Capital Structure and Innovation Strategy: A Study in the Brazilian Context

Abstract:     
The modern theory of the capital structure has been the subject of a great amount of studies, since the publication of the famous article by Modigliani and Miller (1958) where they defended that, under certain circumstances, the leverage (relationship between equity capital and third party capital) used by companies would not have impact on its value. Throughout time several theories had been developed to explain how companies define their level of indebtedness; one of them attempts to explain how specific aspects of each organization influence its capital structure. This paper, based on research prepared and published by Jonathan P. O'Brien in the United States of America, evaluates for the Brazilian context the existence of empirical evidences of the occurrence of one of these particular aspects, innovation. The adoption of a competitive strategy based on innovation influences the financing structure of organizations. Innovative firms use, predominantly, equity capital and are forced to keep financial slack, since these firms are riskier. Of the three hypotheses proposed in this paper, two had not been corroborated by the statistical tests, while the other presented the results foreseen by the theory and compatible with other empirical studies on this subject.

Number of Pages in PDF File: 18

Keywords: Innovation, indebtedness, competitive strategy based on innovation, financial slack

JEL Classification: G21, G12

working papers series