Asian Review of Financial Research Vol.34 No.2 pp.105-131 https://www.doi.org/10.37197/ARFR.2021.34.2.4
The Relation between Innovation and Cost of Debt Capital : High-tech·non-high-tech Industries and Pay Equality
Key Words : Innovation,Patent,Cost of debt capital,High-tech·non-high-tech industries,Pay equality
The importance of a firm's innovation is emphasized because the innovation can promote not only a firm's competitiveness but also viability(Park, Park, and Cho, 2006; Jeon and Lee, 2015). However, in Korea, little literature has been explored the relationship between firms' innovation and cost of debt capital. Therefore, we investigate the effects of innovation on the cost of debt capital by using KOSPI-listed companies. In addition, we examine if there are any differences in the relationships between innovation and cost of debt capital when companies belong to the high-tech or non-high-tech industries. We also analyze how the interaction term between innovation and pay equality can affect the cost of debt. This paper proxies the level of a firm's innovation by using the number of granted patents. For this, we collect patent data from KIPRIS(Korea Intellectual Property Rights Information Service) of the Korean Intellectual Property Office. As a proxy of firm's innovation level, the patent data could be more suitable than research and development expenditure data because the granted patents can be recognized as the output of innovation activities(Choi, 2018). The main results can be summarized into three parts. First, in our regression, the number of granted patents as a proxy of innovation has a negative effect on the debt cost which shows that more innovative company has a lower cost of debt. It also implies that a firm's innovation activities could be recognized positively by creditors. These findings are also robust when we use a two-stage least squares regression model, pooled OLS regression model, and random effects model. Our results are consistent with Hsu, Lee, Liu, and Zhang(2015) which investigates the effect of innovation on the cost of capital using the United States data. Second, in high-tech industry, the acquiring patent rights is one of the key factors for surviving. Thus, we split the sample into high and non-high-tech industry groups. The results show that the coefficient of innovation is significant in the high-tech industry, but not in the non-high-tech industry. These findings imply that bond investors may think that the innovation is more important for high-tech firms than non-high-tech firms. Third, in high-tech industry, the coefficient of pay equality is positive and the coefficient of interaction term between innovation and pay equality is significantly negative. The pay equality variable takes the value of one if manager-employee pay gap ratio is equal or less than the median, and zero otherwise. In summary, this study finds that the firm's innovation has a positive effect on the cost of debt capital and this relation is significant when the firms belong to high-tech industry, not in non-high tech industry. We also find that, in high-tech industry, the pay equality of manager-employee may increase the cost of debt capital but a firm's innovation activities can reduce the negative effects of pay equality. These findings provide useful information and make contributions not only for high-tech firms' managers but also for innovation policy makers.