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R&D intensity and intangible assets effect on capital structure : an empirical analysis of the it services industry

Ruth, Anders; Nyvoll, Sebastian
Master thesis
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URI
https://hdl.handle.net/11250/2644213
Date
2019
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  • Master Thesis [4207]
Abstract
In the 21st century, firms aim to meet consumer preferences in an absurdly rapid manner with

new technological products and solutions. Innovation from R&D investments has become

increasingly important to meeting this demand. Furthermore, as more firms become

technology-minded, intangible assets constitute growing parts of their total assets. In this thesis,

we analyse the effect of these increasingly important factors (i.e., R&D intensity and intangible

assets) on capital structure for the IT services industry.

In addition to analysing intangible assets and the R&D intensity effect, we also investigate the

impact of macroeconomic factors on capital structure. We include commonly known

determinants of capital structure as control variables in a panel data regression to a sample of

808 globally listed IT services firms. Country-specific R&D tax subsidy rates work as a natural

experiment, and we utilize this in a two-stage least squares (2SLS) estimation to establish a

causal relationship between R&D intensity and debt and equity issuance. The results are

analysed in light of theories and empirical studies related to capital structure.

Our findings suggest that IT services firms tend to have lower leverage ratios than other

industrial companies from G7 countries, and that the standard determinants of capital structure

have the same effect on leverage that previous studies have indicated. By including

macroeconomic factors, we observe a countercyclical debt ratio among IT services firms.

Regarding intangible assets, we find a positive relationship to leverage ratio, debt and equity.

This relationship implies that creditors view such assets as collateral, thus supporting a higher

leverage ratio. We document that firms with high R&D intensity tend to issue more equity and

less debt, thereby lowering their overall leverage ratio. However, the results are not robust for

firm-fixed effects, and we cannot fully conclude that R&D intensity and intangible assets effect

debt or if they are part of determining the capital structure of listed IT services firms.

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