**3. Literature Review and Hypothesis Development**

Determinants of capital structure have been at the heart of finance theory for many decades. Still, as Dobusch and Kapeller (2018) indicate, innovation advancements and digital technologies have a big influence on changes in firms' strategic choices, so there is a need to reconsider factors influencing corporate financing decisions, especially in high-tech sectors. The sector is expected to be a crucial factor affecting access to finance, in part because firms in different industries will be seeking to access finance for diverse reasons. High–tech firms very often look for sources of financing for innovative or

R&D activity. Hall (2010) addresses the extent to which innovative firms are fundamentally different from established companies and how it is reflected in their financing.

In terms of methodology, the critical problem concerns the identification and measuring of financial constraints. In other words, the operationalization of this problem may be expressed by the identification determinants of financial leverage, and there is vast literature concerning that problem. However, papers related to the determinants of high-tech companies or NTBFs represent a much narrower field of study. There are at least several significant factors whose impact on financial leverage was empirically investigated and documented. These factors include, among others, the intangibility of assets, R&D intensity, the firm's size, age, liquidity, profitability, intangibility, and institutional setting.

Several researchers identified and documented the fact that access to finance for high-tech companies is constrained. Lee et al. (2015), based on the study of 10,000 UK small and medium-sized companies1, found that access to finance is much more difficult for innovative firms and that this problem has worsened since the 2008 financial crisis. They investigated the relationship between innovation and access to funding while controlling for firm characteristics (size, age, sector, several personal features of the management), and the likelihood of applying. Their focus was on the change in access to capital for innovative firms caused by the 2008 economic crises. It is important to note that their definition of innovative firms is much broader than in other studies, and extends beyond R&D intensive, high technology industries. The results suggest that there are barriers to obtaining external finance for innovative projects, even controlling for several factors that might have influenced more difficult access to funds. They indicate that there are two kinds of problems in financial systems. The first one is related to structural problems connected with financial constraints for innovative firms. The second problem concerns cyclical issues caused by the financial crisis, which, surprisingly, has had a more severe effect on non-innovative firms' access to finance. They find that innovative firms in the UK show higher demand for external capital but encounter more significant barriers to obtaining financing (restricted supply). In their case, there is a much higher imbalance between demand and supply compared with non-innovative firms.

Brown and Lee (2019) challenged the assumption of innovative firms having problems with access to credit. They concluded, based on the survey of 8000 UK SMEs in the period following the financial crisis of 2008, that there is no difference in access to external finance for high growth SMEs and other companies. The authors focus on the high growth of SME firms but admit that those are particularly likely to be innovative firms, and R&D activity is especially seen as growth-inducing. They find that a vast majority of high growth companies (achieving rapid growth in turnover and employment) rely strongly on debt, not equity finance for investment purposes (the situation is different in the case of working capital purposes). Based on these findings, the authors question the rationale for UK government policy aimed at increasing credit availability for high growth innovative companies.

An important strand of literature concerning the financing of innovative firms is focused on venture capital and other forms of equity financing tailored to financing risky, innovative projects. Economic literature shows that innovative firms are more dependent on equity than debt financing (Brown et al. 2009; Brown et al. 2013; Falato et al. 2018). Still, there is also a growing interest in access to bank financing (the more standard, traditional form of funding).

### *3.1. Intangibility*

Studies exploring the relationship between intangible assets and capital structure are still relatively rare. In the economic literature, tangible assets are widely recognized as an important determinant of financial leverage because of their potential to be treated as collateral. However, investigating the influence of intangibles on the corporate capital structure is of vital importance because in today's economy a large and still increasing part of companies' assets is represented by intangibles. For obvious

<sup>1</sup> SMEs are defined as those with fewer than 250 employees, but excluding those without employees—so SME Employers.

reasons, it should be assumed that this phenomenon is especially evident in the case of high tech companies, where innovation activity is crucial. For that reason, intangible assets account for a substantial part of total assets. However, the situation is more complicated because of the phenomena of underreporting of R&D outlays, which is a visible problem in today's financial reporting on emerging economies.

As Lim et al. (2020) indicate, internally generated intangible assets are reported in balance sheets and other companies' reports. For that reason, it is very difficult to evaluate the impact of intangibles on financial leverage (under accounting rules, most of the internally generated intangible assets are not recognized on the balance sheet).

Peters and Taylor (2017), based on a sample of U.S. firms, estimated that an average firm acquires externally only 19% of intangible capital. Therefore, the vast majority of intangible assets are missing from the balance sheet, so they construct a proxy to measure the value of internally acquired assets by accumulating past intangible investments reported on firms' income statements. They define the stock of international intangible capital as the sum of knowledge capital and organizational capital. Knowledge capital is created in the process of R&D activity, and to measure it, Peters and Taylor (2017) use the perpetual inventory method. The accounting approach is different from externally acquired intangible assets that are capitalized.

Lim et al. (2020) also point out that intangible assets may discourage debt financing because of poor collateralizibility and high valuation risk. However, they come to the conclusions that identifiable intangible assets have the same positive influence on financial leverage as tangible assets, and that they support debt. The study is based on a sample of 469 US public companies between 2002 to 2014. The dataset consists of targets of acquisitions, and in such transactions, there is a disclosure requirement for the acquiring firms to allocate the purchase price paid for the target to two main subsets of tangible and intangible assets. Authors in their research use fair value estimates (not the usually used book value) of both tangible and intangible assets. They divide intangible assets into two categories: identifiable intangible assets (among them technology-related as patents and in-process R&D, marketing-related as trademarks, trade names, customer contracts, customer relationships, and others as non-compete agreements, unproven mineral or gas properties) and unidentifiable intangible assets—goodwill.

Hall (2010) indicates that in the case of high-tech companies, not only are a significant part of results intangible, but "much of it is in the form of human capital embedded in the heads of the employees." It has low salvage value and is also idiosyncratic, which means that when a company goes out of business, it is a signal that its value is low. As Hall stresses, except for certain types of patents, there is little market for distressed intangible assets. This is one more reason for debt financing being poorly suited to the financing of R&D intensive sectors.

Some studies in the economic literature investigate the relationship between one subset of intangible assets—patent counts—and financial leverage. The main limitation of these studies is that there are no objective methods in the valuation of patents.

Mann (2018) calculated that in 2013, 38% of US patenting firms used patent portfolios as collateral for secured debt, so this type of intangible assets contributes significantly to the financing of innovation. Mann (2018) also stressed that 16% of patents produced by American firms have been pledged as collateral at some point. The pledgeability of patents depends on their high level of citation counts and generality. Brown et al. (2009) points out that companies using patents as collateral mainly belong to the high-tech sector and feature low tangibility. Therefore, we posit the following hypothesis:

**Hypothesis 1 (H1).** *Intangibility has a significant and negative impact on the financial leverage of NTBFs.*
