Track: Financial Engineering

Abstract

One of the crucial aspects for a firm is to choose the right mixture of debt and equity to make a financial decision. While debt is a cheaper source of equity as it offers tax savings, there are other financial risks associated with the use of debt such as high-interest rates and cash flow difficulty. Equity is less risky, but more expensive when compared to debt financing. It might take several years to gain returns from an innovative project, and all companies do not have enough internal resources to invest in research and development which is one of the main reasons companies seek external financing sources. In this paper, the use of debt/equity and its impacts on the innovative activities of a firm will be discussed. A rigorous study of the impact of leverage on the research and development expenses of a firm (a proxy of innovation) will be conducted with the help of Regression analysis to show that debt financing of a company is not directly related to the innovation output of a firm when the market value of firms are controlled. This study explores meaningful insights on how capital structure affects the technological innovation of a company.