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

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.