The Effects of Innovation on Capital Structure: Evidence from US and European Firms

This paper investigates the impact of innovation, particularly in the form of patents and citations, on the capital structure decisions of firms in the US and Europe. As firms increasingly rely on intangible assets like intellectual property, understanding how innovation influences financing choices is crucial. Building on a number of financial theories, the study explores whether innovative firms prefer equity over debt due to the intangible nature of their assets and the financing challenges associated with these assets. Using a comprehensive dataset derived from the PATSTAT and EIKON databases, this research employs multiple regression models to analyse the relationship between innovation metrics (patents and citations) and capital structure, measured by market and book leverage. The study also considers macroeconomic factors, such as GDP growth, inflation, and yield spread, as moderating variables that influence this relationship. The results show that innovation has a significant impact on capital structure decisions, with innovative firms more likely to favour equity financing. However, during periods of economic expansion, as measured by GDP growth rate, this relationship between innovation and leverage is mitigated, showing a shift towards debt. This paper contributes to the literature by providing new insights into the complex relationship between innovation and capital structure, highlighting the role of intangible assets and external economic factors in shaping firms' financing strategies.