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Relationship between debt, R&D and physical investment, evidence from US firm-level data

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  • Chaoshin Chiao

Abstract

This paper is motivated by the hypothesis by Hall (1992) who claims that firms prefer to use debt to finance physical investment but not R&D, due to the risky nature of R&D. Employing a dynamic simultaneous approach and R&D Master File, the relationship between debt, R&D and physical investment is reestimated with the full sample and two sub-samples, including firms in all industries, in science-based industries, and in nonscience-based industries, respectively. First, the results show that the contemporary relationship between R&D and physical investment is positively reciprocal, particularly in science-based industries. That is, current R&D positively affects and is positively affected by current physical investment. Second, it is shown that, in (non-)science-based industries, current R&D (raises) lowers current debt and current physical investment raises current debt; and that current debt raises current physical investment and (raises) reduces R&D. In other words, the evidence supports that debt is a resource to finance both physical investment and R&D in nonscience-based industries, but debt is only a resource to finance physical investment but not R&D in science-based industries.

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  • Chaoshin Chiao, 2002. "Relationship between debt, R&D and physical investment, evidence from US firm-level data," Applied Financial Economics, Taylor & Francis Journals, vol. 12(2), pages 105-121.
    • Handle: RePEc:taf:apfiec:v:12:y:2002:i:2:p:105-121
    DOI: 10.1080/09603100110102709
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    1. Bernstein, J.I. & Nadiri, M.I., 1993. "Production, Financial Structure and Productivity Growth in U.S. Manufacturing," Working Papers 93-10, C.V. Starr Center for Applied Economics, New York University.
    2. Bronwyn H. Hall, 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," NBER Working Papers 4096, National Bureau of Economic Research, Inc.
    3. Bronwyn H. Hall, 1990. "The Manufacturing Sector Master File: 1959-1987," NBER Working Papers 3366, National Bureau of Economic Research, Inc.
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