Innovation Success and Capital Structure

Harshit Rajaiya

Journal of Corporate Finance, 2023, vol. 79, issue C

Abstract: This paper analyzes the relationship between firms’ innovation success and their capital structures. I hypothesize that firms’ innovation success reduces the extent of information asymmetry facing them in the equity market, leading to a greater propensity of firms to issue equity rather than debt to raise external financing. Supporting these hypotheses, I show empirically that firms with higher levels of innovation success have lower leverage ratios and a greater propensity to issue equity rather than debt. Further, these firms face a lower extent of information asymmetry in the equity market. I establish causality using instrumental variable analyses, instrumenting for patent grants with patent examiner leniency.

Keywords: Innovation success; Capital structure; Information asymmetry; Equity versus debt issues (search for similar items in EconPapers)
JEL-codes: D23 G32 O31 O34 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:79:y:2023:i:c:s0929119922001882

DOI: 10.1016/j.jcorpfin.2022.102345

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