The Industry Learning Environment and Firm Capital Structure

Abstract

We investigate how the importance of learning-by-doing in an industry is related to firm capital structure in that industry. Learning-by-doing, the improvement in business performance with operating experience, motivates firms to forgo current profits in return for future gains and results in intangible outputs that cannot be used as collateral. So, we hypothesize that firms in learning-intensive industries will be less reliant on debt. We find supporting evidence using data from the U.S. Census Bureau and Compustat on the U.S. manufacturing sector. Within-firm analysis shows that compared with other industries, firm growth in high-learning industries is associated with a lower increase in debt. Consistent with long-term debt being riskier than short-term debt, a difference-in-difference-type analysis reveals that these associations are stronger for long-term debt than for short-term debt. Together, these findings highlight a new implication of learning-by-doing for corporate finance decisions.