Innovation Strategy and Capital Structure of Brazilian Companies
16 Pages Posted: 11 Mar 2010
Date Written: March 9, 2010
This study has as objective to investigate the influence of innovation on capital structure and financial slack of Brazilian companies. In order to conduct the study, four hypotheses are evaluated. The first three hypotheses on this study follow O’Brien’s (2003) propositions. Besides, in an attempt to test the type of financial slack that the companies use to support their innovation strategy and to evaluate profitability, other hypotheses are also tested. H1: The more important the innovation to the company’s strategy, the lesser the leverage. H2: The more important the innovation to the company’s strategy, the lesser the relation between profitability and leverage.
H3: There is a negative interaction between the leverage and the importance of innovation to the company’s strategy, regarding its impacts on the firm’s performance. H4: Enterprises that adopt an innovative strategy financed by equity have more financial slack.
The results show that innovation does not explain variance of the leverage (Hypothesis 1 is not corroborated). Hypothesis 2 predicts that, when innovation becomes an important strategy, the lesser the company’s tendency to follow the pecking order theory of capital structure, and the leverage will weaken. The interaction between the variables innovation and profitability was tested to support the model. In the present study innovation did not explain variance of leverage. Results suggest that the more innovative a company, the higher the leverage. This result seems to confront evidences that the higher risk of an innovative company should be accompanied by more equity. However, in Brazil some companies have access to governmental agency that lends money, with subsided interest rates, for companies in sectors that are considered strategic. Thus, innovative companies may have more leverage due to access to governmental funding.
For Hypothesis 3, results are similar to those of O’Brien’s (2003) work regarding the persistence of performance. It is important to highlight that O’Brien (2003) used market-to-book ratio to analyze performance, whereas this study did not use the same criteria, since we gathered data from private companies, which do not have market values.
For Hypothesis 4, the results show that adoption of innovation strategy financed by equity imply financial slack. Thus, the result could indicate that firms innovate with the use of slack. Other important indication of these results would be the fact the resources used in the innovation strategy could come from special agencies. In Brazil, the Social and Economic Development National Bank (BNDES) has an important role in financing companies, sponsoring projects and charging lower interest rates. Thus, although not studied in this research, funding from the BNDES is attractive to the Brazilian enterprises and its lower rates may motivate debt by innovative companies.
Keywords: Capital Structure, Innovation Strategy, Leverage, Profitability, Financial Slack, Advertising Intensity, R&D Intensity, Capital Intensity, Tangibility
JEL Classification: D21, L00, L16, M1, M11, O12, 014, Q3, Q31, Q32, Q33, G12
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