The threat of bankruptcy and financing strategy in learning-intensive industries

Abstract

PurposeThe authors investigate whether firms in learning-intensive industries are more prone to bankruptcy and how this shapes a firm's financing choices.Design/methodology/approachIndustry learning estimates based on US manufacturing firms are obtained from the study of Balasubramanian and Lieberman (2010; 2011), who collected these estimates from the US Census Bureau. Merging the learning estimates with data from Compustat gives us a final sample of 6,138 publicly-traded US manufacturing firms (56,930 firm-years) between 1973 and 2000. The authors use both OLS and IV estimation approaches to test the hypotheses.FindingsThe findings confirm that firms operating in learning-intensive industries have a higher threat of bankruptcy. The authors also find that a debt-intensive capital structure exacerbates the threat of bankruptcy; therefore, firms in such industries have a significantly lower reliance on debt financing.Practical implicationsIn the current turbulent business environment, managers operating in learning-intensive industries need to be more careful while making financing choices between debt and equity, and they can explore sources of financing that go beyond the capital markets.Originality/valueNo study so far has examined how industry learning intensity, a key industry characteristic, makes firms more prone to bankruptcy, and how this threat of bankruptcy results in more conservative financing choices. By integrating the theoretical perspectives from the structure–conduct–performance (SCP), transaction cost economics (TCE) and threat rigidity paradigms, this paper contributes to the literature by adding the industry learning environment as a novel determinant of firm financing choices and the threat of bankruptcy.