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Relationship between debt, R&D and physical investment, evidence from US firm-level data


  • Chaoshin Chiao


This paper is motivated by the hypothesis by Hall (1992) who claims that firms prefer to use debt to finance physical investment but not R&D, due to the risky nature of R&D. Employing a dynamic simultaneous approach and R&D Master File, the relationship between debt, R&D and physical investment is reestimated with the full sample and two sub-samples, including firms in all industries, in science-based industries, and in nonscience-based industries, respectively. First, the results show that the contemporary relationship between R&D and physical investment is positively reciprocal, particularly in science-based industries. That is, current R&D positively affects and is positively affected by current physical investment. Second, it is shown that, in (non-)science-based industries, current R&D (raises) lowers current debt and current physical investment raises current debt; and that current debt raises current physical investment and (raises) reduces R&D. In other words, the evidence supports that debt is a resource to finance both physical investment and R&D in nonscience-based industries, but debt is only a resource to finance physical investment but not R&D in science-based industries.

Suggested Citation

  • Chaoshin Chiao, 2002. "Relationship between debt, R&D and physical investment, evidence from US firm-level data," Applied Financial Economics, Taylor & Francis Journals, vol. 12(2), pages 105-121.
  • Handle: RePEc:taf:apfiec:v:12:y:2002:i:2:p:105-121 DOI: 10.1080/09603100110102709

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    References listed on IDEAS

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    1. Mueller, Elisabeth & Zimmermann, Volker, 2006. "The Importance of Equity Finance for R&D Activity: Are There Differences Between Young and OldCompanies?," ZEW Discussion Papers 06-014, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Dirk Czarnitzki & Hanna Hottenrott & Susanne Thorwarth, 2011. "Industrial research versus development investment: the implications of financial constraints," Cambridge Journal of Economics, Oxford University Press, vol. 35(3), pages 527-544.
    3. repec:nea:journl:y:2017:i:36:p:107-134 is not listed on IDEAS
    4. Hamadi FakhFakh & Rim Zouari-Hadiji, 2011. "Dettes financières et investissement en R&D:une étude comparative," Working Papers CREGO 1110302, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    5. Hirschey, Mark & Skiba, Hilla & Wintoki, M. Babajide, 2012. "The size, concentration and evolution of corporate R&D spending in U.S. firms from 1976 to 2010: Evidence and implications," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 496-518.
    6. Dirk Czarnitzki & Hanna Hottenrott, 2011. "R&D investment and financing constraints of small and medium-sized firms," Small Business Economics, Springer, vol. 36(1), pages 65-83, January.
    7. Manohar Singh & Sheri Faircloth, 2005. "The impact of corporate debt on long term investment and firm performance," Applied Economics, Taylor & Francis Journals, vol. 37(8), pages 875-883.
    8. William Griffiths & Elizabeth Webster, 2004. "The determinants of research and development and intellectual property usage among Australian Companies, 1989 to 2002," Centre for International Economic Studies Working Papers 2004-15, University of Adelaide, Centre for International Economic Studies.
    9. Colombo, Massimo G. & Croce, Annalisa & Guerini, Massimiliano, 2013. "The effect of public subsidies on firms’ investment–cash flow sensitivity: Transient or persistent?," Research Policy, Elsevier, vol. 42(9), pages 1605-1623.
    10. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms' Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, September.
    11. Elisabeth Müller & Volker Zimmermann, 2009. "The importance of equity finance for R&D activity," Small Business Economics, Springer, vol. 33(3), pages 303-318, October.
    12. P. Mohnen & F. Palm & S. Loeff & A. Tiwari, 2008. "Financial Constraints and Other Obstacles: are they a Threat to Innovation Activity?," De Economist, Springer, vol. 156(2), pages 201-214, June.
    13. Raquel Ortega-Argilés & Rosina Moreno & Jordi Caralt, 2005. "Ownership structure and innovation: is there a real link?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 39(4), pages 637-662, December.
    14. repec:eee:chieco:v:46:y:2017:i:c:p:50-66 is not listed on IDEAS
    15. repec:eee:tefoso:v:127:y:2018:i:c:p:127-140 is not listed on IDEAS
    16. Czarnitzki, Dirk & Hottenrott, Hanna, 2012. "Collaborative R&D as a strategy to attenuate financing constraints," ZEW Discussion Papers 12-049, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    17. Crisóstomo, Vicente Lima & López-Iturriaga, Félix Javier & Vallelado González, Eleuterio, 2014. "Nonfinancial companies as large shareholders alleviate financial constraints of Brazilian firm," Emerging Markets Review, Elsevier, vol. 18(C), pages 62-77.
    18. Felix J. Lopez-Iturriaga & Emilio Lopez-Millan, 2015. "Institutional Framework, Corporate Ownership Structure, and R&D Investment: An International Analysis," HSE Working papers WP BRP 36/MAN/2015, National Research University Higher School of Economics.
    19. Giebel, Marek & Kraft, Kornelius, 2015. "The impact of the financial crisis on investments in innovative firms," ZEW Discussion Papers 15-069, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    20. Müller, Elisabeth & Zimmermann, Volker, 2006. "The Importance of Equity Finance for R&D Activity – Are There Differences Between Young and Old Companies?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 111, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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