R&D investment and financing choices: A comprehensive perspective

We posit that the effects of R&D investment on financing choices depend on the degree of intervention barriers and appropriation discrepancy between capital providers and the firm. Based on these two contingencies, we categorize financing instruments into four types: common equity (common stock), convertible securities (preferred stock and convertible debt), transactional debt (corporate bonds), and relational debt (bank and commercial loans). From the experiences of 39 petroleum firms during the period 1976–2005, we found R&D investment has a positive effect on the use of common equity, a U-shaped effect on the use of convertible securities, and an inverted U-shaped effect on the use of relational debt to raise capital. These effects are sustained over several years.