Corporate financing decisions : innovative versus non-innovative firms

Abstract

This thesis uses a sample of 807 firms listed on the London Stock Exchange over the period 1987-2013 to investigate the differences in financing decisions, leverage adjustments and trade credit policies between innovative firms that report R&D and non-innovative firms that do not report R&D. This focus is motivated by the marked increase in intangible investments amongst firms in the UK, and the need to reexamine the overlooked interdependence of financing and investment decisions. The empirical analyses in this thesis use a combination of ordinary least squares with fixed effects (OLS FE thereon) and system Generalised Method of Moments (system GMM thereon) as the main estimation techniques. The results show that leverage is persistent, with innovative firms adopting similar financing structures as noninnovative firms despite being supposedly constrained. Further, innovative firms consistently adjust their leverage towards a target faster than non-innovative firms. This result suggests that innovative firms are more active in managing their capital structure, perhaps because they face higher costs of deviating from target relative to non-innovative firms. The results also show that innovative and non-innovative firms have different credit policies,where the former give (use) more (less) trade credit than the latter. Finally, analyses of time variation in leverage and credit adjustments, which are largely overlooked in the literature, suggest that such variations are important in understanding corporate decisions. This is especially pertinent given the economic shift from predominantly manufacturing based sectors towards technology and service based sectors. Overall, the results show that investment type has a significant effect on corporate decisions beyond the factors reported in the literature.