This licentiate thesis consist of two essays. Both essays deal with corporate finance and its impact on innovation investment.

 In the first essay we use German Community Innovation Survey to identify financially constrained firms. Contrary to previous studies we find that the relationship between financial constraints and firm size is inverted u-shaped and that it is the group of medium sized firms which has the largest funding gaps. This is explained by the fact that these firms have high innovation capabilities but at the same time face high cost of capital. Furthermore, we test if financial constraints have an impact on firm productivity growth. We find negative effects from funding gaps on productivity, but only for investment in tangible capital and not for innovation investments.

The second essay investigates whether there has been a change in the productivity and funding mix of innovative SMEs post stricter bank regulations. Our result shows that the likelihood of using bank loans as a funding source has not changed for innovation investments nor for tangible investments after stricter capital regulations have been announced. On the other hand, sources such as subsidies have increased due to regulatory programs that have been implemented in the aftermath of the recent financial crisis. Furthermore, SMEs productivity has not changed post stricter bank regulations. Overall, the impact from different sources of funding on productivity is rather limited.