Growth Opportunities, Knowledge Capital and Leverage: Evidence from US Biotech Firms

This paper investigates the interaction among a firm’s knowledge capital, growth opportunities, earning dynamics, and optimal leverage level. Under the corporate taxation and personal taxation framework, by assuming knowledge capital positively affects the realization of a firm’s growth opportunities, I find a positive relation between a firm’s optimal debt level and its knowledge capital. Meanwhile, I identify a negative relation between R&D investment and leverage in the presence of better measures for a firm’s knowledge capital. By using the data collected for US biotech firms, I find that firms’ debt ratios are indeed positively related to their knowledge capital measures: citation-weighted patent counts or claim-weighted patent counts. Furthermore, by employing an event study approach, I find a firm tends to increase its leverage after the enhancement of its knowledge capital.