Dynamic Analysis of Capital Structure in Technological Firms Based on Their Life Cycle Stages

Abstract

This paper analyzes the effect of a firm’s life cycle stages on capital structure in tech versus non-tech firms using a wide sample of public companies from Europe. An innovative approach based on operating, investing, and financing cash flows allows us to analyze differences in leverage and specify the differential role of significant drivers of capital structure across stages in both sectors. Our results point to the information asymmetry factor posed by the pecking order as the predominant driver behind the differences in the effect of intangible assets and growth opportunities for tech firms in some stages, mainly maturity. Frank and Goyal’s (2003) test of the pecking order theory confirms the lower use of debt by tech firms during all life cycle stages. In addition, we find that the results obtained for tech firms are largely attributable to the behavior of high-tech firms with the highest growth opportunities.

Keywords: Life cycle, Capital structure, Technology firms, Growth opportunities, Leverage, Pecking order theory

JEL Classification: D91, D92, G32, L6