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Capital structure and innovation: causality and determinants

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  • Eleonora Bartoloni

Abstract

It is widely recognized that a firm’s financial behaviour is the result of a complex mix of conditions, both internal and external to the firm; these may affect its investment decisions and its growth opportunities. This paper offers a twofold contribution to the empirical debate on the financing of innovation. First of all, it provides a comprehensive descriptions of possible simultaneous patterns which may affect a firm’s relevant dimensions, namely innovation inputs, innovation output, leverage and profitability. By using a Granger-Causality framework we will show that a firm’s leverage does not cause innovation output, as proxied by a measure of a firm’s successful innovation, while it is rather caused by successful innovation and a firm’s operating profitability. The second contribution is an original investigation of the determinants of a firm’s capital structure based on a panel of Italian firms which links the third Community Innovation Survey with an administrative data source providing economic and financial information collected from balance sheets and income statements referring to the period 1996–2003. This paper provides support for the pecking order theory as our firms are less indebted when operating profitability increases, but the use of external funding increases with their innovative effort. We also find support for the existence of credit constrains which seem to affect small innovative firms when compared with larger enterprises. Copyright Springer Science+Business Media, LLC. 2013

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  • Eleonora Bartoloni, 2013. "Capital structure and innovation: causality and determinants," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(1), pages 111-151, February.
    • Handle: RePEc:kap:empiri:v:40:y:2013:i:1:p:111-151
    DOI: 10.1007/s10663-011-9179-y
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    More about this item

    Keywords

    Capital structure; Innovation; Profitability; Community innovation survey; Panel data; G32; O32; L25;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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