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Working paper

Could High-Tech Companies Learn from others while Choosing Capital Structure?

Kokoreva M. S., Stepanova A. N., Повх К. С.
This paper analyzes why high-tech firms are less likely to have debt in their capital structure. The share of zero-leverage firms increased in the US in the Software & Services, Hardware Equipment and the Pharmaceutical & Biotechnical industries which are treated as high-tech firms in our research. We divide the sample of US-based firms from the RUSSELL 3000 index for the period from 2004 to 2015 into two groups, one of them includes only high-tech firms, another contains all other firms from the sample. Traditional determinants of corporate structure such as size, age, asset tangibility, profitability and market-to-book ratio cannot fully explain why high-tech firms choose a zero-debt policy. We found that high-tech firms are more financially constrained than non-high-tech firms. The managerial entrenchment hypothesis could not predict zero-leverage for high-tech firms, but it can partially predict the debt conservatism of non-high-tech firms. The evidence shows that the excess cash hypothesis explains why unconstrained high-tech firms have zero-leverage but does not explain it for non-high-tech firms. Finally, we did not find a significant influence of the financial flexibility hypothesis for the decision of unconstrained high-tech firms to be unlevered, while for their non-high-tech counterparts this hypothesis fits.