Corporate Investment By US Firms: Value-Driven Shift Toward R&D and Financing Implications

Abstract

Using data for 1973-2005, we document a substantial shift in investment by US firms away from capital expenditures and toward R&D. Tobin's Q analysis indicates that this shift is value-driven. The shift has implications for external financing: When internal funds are insufficient, firms generally issue equity (debt) to finance R&D (capital expenditures). However, as R&D investment increases, external financing of capital expenditures shifts from debt to equity. We also find that the form of investment affects the form/size of external financing even after controlling for the change in growth opportunities, capital structure adjustment behavior, and pecking-order related behavior.