Debt and Taxes: Marginal Tax Rate Changes, Capital Structure, and Innovative Activity in the Biotechnology Sector

Grant H Skrepnek
Associate Professor, The University of Oklahoma Health Sciences Center
T. Corbin Thompson
Eric J. Johnson

DOI:https://doi.org/10.5912/jcb683

Abstract:

The purpose of this investigation was to examine the association between changes in corporate marginal tax rates (MTRs) and measures of both innovative activity and capital structure among publicly-traded biotechnology firms.  Across a 1980-2010 time frame, a five-year distributed Almon lag model was utilized to assess the effect of annual changes in MTRs upon patenting activity, research and development (R&D) expenditures, cash and short-term investments, debt-to-asset ratios, and debt-to-equity ratios.  Across the 99 biotech firms studied, results suggested that increases in MTRs were significantly associated with marked decreases in patents, R&D expenditures, and cash and other short-term investments.  Additionally, large and statistically significant increases in both debt-to-asset and debt-to-equity ratios were observed with annual increases in MTRs.  While this research can not necessarily discern whether capital structure changes occurred either as an ex-ante response to or an ex-post result of MTR increases, the implication of decreased patenting activity warrants continued evaluations of both internal financial decision making and external tax policy.

Keywords:marginal tax rates ,capital structure ,debt ,R&D ,cash flow ,patenting activity ,biotechnology ,en ,