Intellectual Capital and Financing Decisions: Evidence from the U.S. Patent Data

Qiao Liu () and Kit Pong Wong ()
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Kit Pong Wong: School of Economics and Finance, University of Hong Kong, Pokfulam, Hong Kong

Management Science, 2011, vol. 57, issue 10, 1861-1878

Abstract: This paper develops a real options model to understand two distinct roles played by intellectual capital in corporate financing decisions. Whereas limiting a firm's debt capacity because of its low liquidation value, intellectual capital enhances a firm's debt capacity through its positive impact on earnings. Our model shows that the former dominates or is dominated by the latter, depending on whether the rate of dissipation of intellectual capital upon default is larger or smaller than a critical level, respectively. Using patent-based and research-and-development-based variables as proxies for intellectual capital, we find robust evidence that the relation between intellectual capital and leverage is positive. Specifically, a one-standard-deviation increase in the level of a firm's intellectual capital is associated with an increase of 6.6% to 21.1% in its market leverage. We further find this positive relation to be stronger for biotechnology firms. This paper was accepted by Wei Xiong, finance.

Keywords: capital structure; default; intellectual capital; patent-based metrics; R&D-based metrics (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (10)

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