Innovation Success and Capital Structure |
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| Institution: | 1. Sabancı University, Sabancı Business School, Turkey;2. University of Maryland, Robert H. Smith School of Business, United States of America;3. Koc University, College of Administrative Sciences and Economics, Turkey;1. Department of Accounting, Antai College of Economics and Management, Shanghai Jiao Tong University, 1954 Huashan Road, Shanghai, 200030, China;2. Department of Accounting, Business School, National University of Singapore, Mochtar Riady Building, BIZ 1, # 07-30, 15 Kent Ridge Drive, 119245, Singapore;3. Institute of Accounting and Finance, Shanghai University of Finance and Economics, No.777 Guoding Road, Shanghai 200433, China;1. Business School, University of Bristol, UK;2. School of Accounting, Guangdong University of Foreign Studies, Guangzhou, China;3. Research Center for Accounting and Economic Development of Guangdong-Hong Kong-Macao Greater Bay Area, Guangzhou, China;1. School of Economics and Finance, Xi''an Jiaotong University, Xi''an, Shaanxi 710061, PR China;2. The Center for Economic Research, Shandong University, Ji''nan, Shandong 250100, PR China;3. School of Economics, Central University of Finance and Economics, Beijing 102206, PR China |
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| 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. |
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| Keywords: | Innovation success Capital structure Information asymmetry Equity versus debt issues |
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