Abstract
This paper examines the interaction between innovation and financial structure under monopoly. We characterise the effects of debt levels on innovative investment by considering a limited liability effect. On one hand, higher debt levels promote both innovative investment and the outputs. On the other hand, shareholders’ net benefits are reduced by higher debt levels and net profit per debt is correspondingly reduced by higher debt level under positive net profit. More importantly, this study captures the interaction between financial structure and industrial organisation without restriction of the interior point.
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