R&D Intensity and Financing Decisions: Evidence from European Firms

This paper examines whether research and development (R&D) intensity affects the firm's financing decisions. We use a sample of European firms over the period 2002-2011. We argue that R&D asset has three fundamentals characteristics that make it different from ordinary investment and constrain financing choices of the firm. First, The R&D is a specific non-redeployable asset with higher premium risk. Second, it generates stronger growth opportunities and, third, represents a major contributor to asymmetric information. Based on the implications of the transaction cost theory, the agency cost and pecking order theory, we argue that these fundamentals characteristics affect the financial policy. Our results show that R&D-intensive firms exhibit lower leverage, a shorter debt maturity, a lower dividend payment and a higher cash level.