The New Strategy of High-Tech Companies – Hidden Sources of Growth

Abstract

The recent increase in the share of zero-leverage firms is most pronounced in the Software and Services, Hardware Equipment, and Pharmaceutical and Biotechnical industries. The reasons for these industries’ conservative debt policies are not fully disclosed. How companies in technological sectors manage to perform well attracting no debt and losing debt tax shield benefits is a mystery. This study aims to determine why high-tech firms are less likely to have debt in their capital structure. On a sample of US-based firms from the RUSSELL 3000 index for the past 12 years, we show the factors leading to a zero-debt structure. After dividing the sample into high-tech and non-high-tech subsamples, we demonstrate the gap between zero-debt motives for technological and tra-ditional sectors. We show that the common determinants of the corporate structure cannot fully explain why high-tech firms choose a zero-debt policy. Testing the possible motives of debt financing avoidance, we find that high-tech firms are more financially constrained than non-high-tech firms. We further show that unconstrained high-tech firms may avoid debt to maintain their financial flexibility. On top of that, managerial entrenchment also adds to the zero-leverage choice of high-tech companies. This study’s results are helpful for top-management teams and investors since they shed light on the specific style of financing choice for technological firms.