The R&D Tax Incentive as a Source of Funding for Early Stage Firms: Evidence From Australian Mining Exploration Entities

43 Pages Posted: 13 Dec 2019

See all articles by Andrew Ferguson

Andrew Ferguson

Department of Accounting, UTS

Samuel Sherry

affiliation not provided to SSRN

Date Written: November 27, 2019

Abstract

Prior research documents impediments to raising external equity finance faced by early stage and R&D firms. The capital structure literature predicts that these firms prefer to finance their projects with internal funds, with equity used as a last resort. We examine the 2011 changes to the R&D Tax Incentive (“R&DTI”) in Australia, which allowed small firms in a tax loss position to exchange a portion of their unused losses for a cash refund of up to 45% of their eligible R&D expenditure, potentially providing an alternative funding channel. Using a sample of 322 ASX-listed mining exploration entities (“MEEs”) receiving R&D tax refunds between 2008 and 2015, we find that the number of firms accessing the R&DTI increased significantly after 2011, as did the average refund received. The increase in R&DTI claims are concentrated in firms having previously disclosed a mineral resource or ore reserve. We find that R&D firms are generally less risky than non-R&D firms of comparable size. This is likely due to companies engaged in greenfield exploration (the most high-risk form of exploration) investing less in R&D compared to those conducting R&D around an existing mineral deposit.

Keywords: tax incentives; research and development; extractive industries; pecking order

JEL Classification: G32, H25, N57, O38

Suggested Citation

Ferguson, Andrew and Sherry, Samuel, The R&D Tax Incentive as a Source of Funding for Early Stage Firms: Evidence From Australian Mining Exploration Entities (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=3494000 or http://dx.doi.org/10.2139/ssrn.3494000

Andrew Ferguson (Contact Author)

Department of Accounting, UTS ( email )

PO Box 123 Broadway
Sydney, NSW 2007
Australia
61 2 9514 3565 (Phone)

Samuel Sherry

affiliation not provided to SSRN

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