This project is an empirical investigation into the effects of changes in corporate capital structure on the long term investment strategies of firms, motivated by an interest in the general question of whether publicly traded corporations are the best medium for the financing of investment directed toward long term growth of the economy. In the course of this project, a large panel data set of manufacturing firms with data from 86 through 88 will be updated. This augments the sample of manufacturing mergers (about 600 from 76-85) with those which occurred during 86, 87, and 88. The project uses the new sample to replicate and extend previous findings on the effects of mergers on R&D investment, paying particular attention to the longer term effects and to the effects of changing leverage on the firm's strategies. Finally, the project builds and estimates a model of the joint choice of financing and investment by the firm which incorporates tax differences, asymmetric information, and transactions costs. The model is used to investigate the hypothesis that R&D investment is more easily financed out of retained earnings than out of new debt or equity (relative to other kinds of investment). If this is true, changes in debt/equity ratios may tilt the incentives for investment away from R&D. The project contributes to our understanding of R&D with better data, improved theory and empirical studies. The original data set is an important resource for studies of R&D expenditures by U.S. manufacturing firms. The empirical research by this project addresses an extremely timely issue, the effects of mergers on U.S. technology. Preliminary results by the investigator raise the disturbing possibility that certain types of mergers weaken U.S. R&D efforts.
