Innovation and Capital Structure
Marie and I are deep into our thesis, which I have promised to tell you about on several occasions. I am working on it right now, actually, but I just needed a break from it (which I then use to write about the thesis on this blog — what a break!).
We write about business strategy and how this can be coupled with the firm’s capital structure. Capital structure (also called financial structure) refers to the way the firm finances itself — very simplified you can either use your own money (equity) or the bank’s money (debt). Coupling strategy and capital structure theory is rather new, and hasn’t been done much before the very end of the 80’s — and there is still a lot of ground to be covered.
Within strategy, we look at innovation and to which degree the firm focuses its strategy on innovation and how it affects its financing decision. Our main hypothesis is that the more the firm focuses on innovation, the more it will use equity financing, other things equal. The immediate rationale for this is that equity capital is more risk-willing than debt capital — and when you have an innovation strategy, you take more risk than firms that do not have an innovation strategy. That is the basic notion, although there are plenty more arguments and details — but then I could go on forever :-).
Marie and I have been able to prove such a relationship between the degree to which the firm’s strategy is focused on innovation and its capital structure. We have looked at more than 2,000 companies, and our findings are quite significant. Below, I have quickly made a graph, that illustrates our findings (albeit simplified). Another interesting feature of our findings, which you can see from the graph, is the polynomial relationship (the famous s-curve).
That was the short story. I don’t think I’ll write much more about it on the blog, because it is somewhat different from the topics I normally write about. Still, if you want to know more about this and our findings, let me know.
February 19th, 2007 at 10:36 am
[...] Just over a month ago, I handed in my thesis, and two weeks ago I had the oral defense. Read more about my thesis here. [...]
March 26th, 2007 at 9:51 pm
Hej Bjørn. Spændende emne som jeg for første gang ser beskrevet men som jeg pr intuition har praktiseret i min privat økonomi på trods af modsatte råd fra såvel revisor som bankrådgivere. Jeg mener at ingen gæld og selv financiering giver dig større frihed til at gennemføre spændende projekter og ideer med til en vis grad af risikovillig kapital hvilket igen giver mulighed for større afkast. Desværre har jeg ikke helt kunnet få dette gennemført på klinikken pga mine kolleger modsatte ideer. K.h onkel Steen