Abstract
Taking a transaction costs economics perspective of the financing behavior of firms, we propose that the firm’s innovation strategy relative to its peers is associated non-linearly with its demand for leverage. Specifically, demand for leverage is negatively related for firms with low emphasis on innovation relative to peers but positively related for firms with high emphasis. We further propose that the firm’s international diversification strategy moderates this relationship, resulting in the two strategies being substitutes or complements, depending upon the level of innovation strategy. These arguments are tested with data from U.S. public firms during 1980 to 2018.
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