The objective of thesis is to examine how innovation as measured by R&D expense ratio affects capital structure. An unbalanced panel of 202 firms from technology and hardware equipment industry in the USA and China is collected during 2012-2019. By the use of static and dynamic models, the empirical results reveal firm managers apply a conservative policy: Firms tend to preserve low indebtedness when profitability and innovative effort increase noticeably, which supports both trade-off and pecking order theories. The study also finds the effect of R&D on firm leverage is different in each country, and changes due to the change in macroeconomics such as the US-China trade war. Last, in the dynamic model, the system Generalized Method of Moments (SGMM) presents more accurate findings than pooled OLS, fixed effects model (FEM) and random effects model (REM) to investigate not only the adjustment of firm target leverage, but also the significant negative relationship between R&D and capital structure.

Abstract i
Acknowledgement ii
Table of contents iii
List of figures v
List of tables vi
CHAPTER 1: INTRODUCTION 1
I) Background of the study 1
II) Significance of the study 2
III) Research questions 4
IV) Layout of the study 5
CHAPTER 2: LITERATURE REVIEW 6
I) Capital structure theories 6
1. Modigliani and Miller proposition 1 6
2. Modigliani and Miller proposition 2 6
3. Trade-off theory 7
4. Pecking order hypothesis 8
5. Market timing theory 9
II) Capital structure: The dependent variable 10
III) Determinants of capital structure 11
1. R&D 11
2. Profitability 12
3. Tangibility 12
4. Market to book value 12
5. Firm size 13
IV) Empirical evidences of trade-off theory and pecking order theory 14
1. In developed countries 14
2. In developing countries 15
V) Empirical evidences of innovation and capital structure 16
1. In developed countries 16
2. In developing countries 18
VI) Hypothesis development 19
 
CHAPTER 3: RESEARCH METHODOLOGY 21
I) Sample collection 21
II) Research framework 21
III) Model specification 23
1. Static model 23
2. Dynamic model 25
CHAPTER 4: RESULT AND DISCUSSION 27
I) Descriptive statistics 27
II) Empirical results 30
1. Static model: Research question (1) to (4) 30
2. Dynamic model: Research question (5) 38
III) Summary 41
CHAPTER 5: CONCLUSION AND RECOMMENDATION 42
I) Conclusion 42
II) Policy implications 44
III) Limitations of the study 45
IV) Future research 45
APPENDIX 46
Appendix 1. Descriptive statistics of subsample 48
Appendix 2. Leverage 49
Appendix 3. R&D ratio 49
Appendix 4. Profitability 50
Appendix 5. Tangibility 50
Appendix 6. Market to book value 51
Appendix 7. Firm size 51
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