Financing Technological Innovation: Evidence from Patent-Intensive Firms

• Published in: Global economic review Vol. 48; no. 3; pp. 350 - 362
• Main Author: Kim, Taehyun
• Format: Journal Article
• Language: English
• Published: Abingdon Routledge 03-07-2019; Taylor & Francis Ltd; 동서문제연구원
• Subjects: Capital structure; Companies; Conflicts of interest; Debt; Debt financing; debt overhang; Financing; growth options; innovation; R&D; Technological change; 경제학
• ISSN: 1226-508X; 1744-3873
• DOI: 10.1080/1226508X.2019.1636702

Equityholders of firms with high debt loads have an incentive to underinvest, a distortion that can be most costly for firms with attractive growth options. Using a novel patent-based measure of a firm's growth options, we find that firms issue more equity and shy away from debt financing when they have larger investment opportunities sets. The results are more pronounced among firms in patent-intensive industries. The findings suggest the existence of conflicts of interest between debtholders and equityholders. Our results are consistent with the use of conservative debt policies by technology-intensive firms to mitigate the debt overhang associated with their future growth options.