*3.2. Investment in Innovativeness*

There is ample empirical evidence suggesting that the capital structure of R&D intensive firms exhibits significantly less debt than in the case of other firms. The problem of financial constraints in financing R&D intensive or innovative firms is well pronounced in economic literature. These problems are also referred to in economic literature as structural problems of the financial system in financing R&D or, more broadly, innovations. The reasons for that include higher risk, information asymmetry between financing providers and companies themselves (the main theoretical premise for the difficulties SMEs face when accessing external capital, which are due to the context-specific nature of R&D projects, which makes them very difficult for valuation), and the lack of collateral in the case of firms based mainly on intangible assets (denied finance due to their lack of collateral). Studies typically suggest that all these reasons cause innovative firms to encounter severe obstacles when it comes to acquiring debt financing. Internal finance is usually insufficient to finance rapid growth.

A study by Alderson and Betker (1996) provides evidence that there is a positive relation between liquidation costs and R&D in the corporate sector. Therefore, R&D activity is associated with higher sunk costs than other types of investments.

Guiso (1998) finds evidence for a representative sample of about 1000 Italian manufacturing firms with 50 or more employees. Those which belong to the high-tech sector are more likely to be credit-constrained than low-tech companies. Measurement problems in the proxies for high-tech firms make it difficult to provide a precise estimate of the size of the effect. The author also points out that credit constraints have a highly counter-cyclical pattern with the proportion of firms, with limited access to financing increasing during the downturn.

A very important issue is the relation between intangibility and investment in innovativeness. We distinguish two types of investments in innovativeness, which are measurable in the accounting system: external and internal. The internal one refers to R&D outlays expended in a given period (usually one year) on the firm's own invention. The external one refers to the expenditures on other intangible assets acquired externally, having mainly an innovative character. The last concept—intangibility—refers to the attribute of total assets, which has a cumulative and resource character. Usually, high intangibility is caused by heavy investments in innovativeness over a longer period. However, in some instances, it can be triggered by a low carrying amount of tangible assets. Therefore, from the perspective of a given reporting period, the mutual correlation between intangibility and investments in innovativeness is not necessary. Both concepts: intangibility and investments in innovativeness refer to similar but different concepts.

Firstly, we conjecture that, in a country that is at the stage of development classified as an emerging market, the more a firm invests in an innovative in-house project, the less the bank sector is willing to provide external capital. We argue that in the case of emerging markets, the informational asymmetry gap caused by the R&D project is even higher than in the case of developed markets. Secondly, we hypothesize that the external acquisition of innovation (i.e., technology) does not create informational asymmetry. Therefore, it does not increase the cost of external capital. Quite the opposite, it makes a company a more attractive client for the bank sector, with better prospects for the future. Therefore, we posit that the more a company invests in externally acquired innovation, the more leveraged it will be. Based on the above-mentioned chain of reasoning, we posit the following hypotheses:

**Hypothesis 2 (H2).** *Internal investments in innovativeness in NTBFs from emerging countries have a significant and negative impact on financial leverage.*

**Hypothesis 3 (H3).** *External investments in innovativeness in NTBFs from emerging countries have a significant and positive impact on financial leverage.*

#### *3.3. Liquidity*

Liquidity is another determinant that has an impact on capital structure and is usually understood as a measure of a firm's capability of debt repayment. High liquidity implies that a company has the potential to pay back debt or shareholders (Ozkan 2001). Low risk of insolvency allows acquiring debt at a lower cost (Morellec 2001). More liquid companies are more prone to undertake riskier projects and finance them via bank loans thanks to a lower risk of solvency problems (Ramli et al. 2019).

According to the pecking order theory, more liquid companies tend to finance their activity mainly by their funds (retained earnings). By doing that, companies avoid taking more costly debt and disclosing confidential information to financial institutions (banks) or investors. Therefore, many researchers hypothesize an inverse relationship between liquidity and financial leverage (Kara and Erdur 2015; Karacaer et al. 2016). Internal financing is preferred over debt, and the surplus of cash flows allows the financing of investment projects. Higher liquidity translates to financial flexibility and opens up possibilities of acquiring debt at a lower cost. Based on our experience, we suppose that in the case of emerging markets liquidity may play an important factor in shaping the capital structure of high-tech companies. Therefore, we conjecture the following hypothesis:

**Hypothesis 4 (H4).** *The liquidity of NTBFs located in emerging markets has a significant and negative impact on financial leverage.*

#### *3.4. Size*

One of the most studied firm parameters is company size. Firm size is likely to influence capital structure in several ways. Larger firms are usually treated as less risky and believed to have fewer constraints in obtaining a bank loan. Risk is higher in the case of small firms, which, due to the lack of scale, cannot diversify the risk and invest in multiple projects (Freel 2007). The financial constraints in financing are well pronounced, especially in the case of small and medium-sized innovative firms (Schneider and Veugelers 2010; Hutton and Lee 2012; Mina et al. 2013; Lee et al. 2015).

At least several important characteristics of a firm's size are invoked in the literature. Bigger companies are able to operationalize more debt in their balance sheets due to more collateral on the asset side (Karacaer et al. 2016; Cai and Ghosh 2003). The size of a company is correlated with its age. In other words, bigger companies are usually the older ones, which means that they are already established in the market, have a deeper knowledge of the market and customer preferences, and have higher credibility, which results in lower operational risk. The financial situation of bigger companies is usually more stable, and the variability of their cash flows and financial risk is lower. Bigger companies may utilize the economies of scale and transfer the cost of short-term financing to their suppliers or clients. Bigger companies tend to engage in international activities, therefore they are more able to diversify their operations and raise funds in foreign capital markets. The cost of external capital is typically lower for bigger companies in comparison to smaller ones. Additionally, bankruptcy costs are lower for bigger companies, and as a result, they are more flexible in terms of managing their liabilities (Demir 2009). Informational asymmetry is lower for bigger companies, which corresponds to a higher quality of financial reporting. Finally, transaction costs necessary to obtain bank loans are usually lower for bigger companies (Hall et al. 2004). All the above factors supposedly make the cost of attracting external capital lower and may imply that the bigger a company, the higher its financial leverage. The study conducted by Nenu et al. (2018), based on the sample of Romanian companies provides empirical evidence supporting this statement. The authors of that study point out that the trade-off theory may explain the research outcome.

In the literature, one can also find the opposite arguments. Bigger companies often accumulated retained earnings for many years, and external capital was not necessary (Kara and Erdur 2015). Bigger companies are also more prone to the problem of moral hazard (Frank and Goyal 2008). Many cases from the past show that bigger companies tend to accept excessive growth, which translates

to lower operational efficiency and, finally, an increased cost of external capital (Ammar et al. 2003). Agency costs are usually higher for bigger companies, which means that monitoring and auditing are more costly (Yildirim et al. 2018). However, higher long-term debt may provide additional incentives to managers for the creation of shareholder value (Izdihar 2019).

External finance is vital for innovative SMEs, as they usually lack the internal sources of financing needed for the commercialization of their innovations (Beck and Demirguc-Kunt 2006; Schneider and Veugelers 2010). The business model of innovative firms is riskier, and the intangible assets account for a bigger part than physical property in their balance sheets, which creates a problem in bank valuation. Intangibles are context-specific, which creates a problem for banks who value them and use them as collateral for lending. Also, Canepa and Stoneman (2008), Czarnitzki (2006), and Freel (2007) suggest that all these structural problems with innovative financing firms are amplified in the case of SMEs. Finally, as Kijkasiwat and Phuensane (2020) documented, bigger companies are more able to benefit from external and internal innovative projects, while the smaller ones only benefit from internal projects.

In the case of NTBFs, an increase in size should result in a decrease in operational and investment risk. However, it is probably at a higher level compared to other firms. Likewise, bankruptcy costs should be lower, yet substantial. The scope of information asymmetry will decrease, agency costs may be lower, but not low. It can be expected that NTBFs' willingness to attract external capital will increase with its size (Berggren et al. 2000). Therefore, we conjecture the following hypothesis:

**Hypothesis 5 (H5).** *The size of NTBFs located in emerging markets has a significant and positive impact on financial leverage*.

#### *3.5. Age*

The next important determinant of capital structure—a firm's age—is especially important in the case of the high-tech sector. Some authors take into account the age of the firm as a determinant in obtaining a bank loan. According to Cowling et al. (2012), the size of the company and its track record influence bankers' decisions to credit an entity, putting small and young firms at a disadvantage. Older companies also have more fixed assets, which can serve as collateral for the long-term credit loan, which also makes the debt more accessible and less costly. The results of empirical studies suggest that the firm's age allows it to curtail limits typical for high-tech companies, especially higher risk. Older firms have lower bankruptcy costs, lower costs of external capital, a broader customer base, more stable financial results over time, and more profitable companies (Malik 2011; Bhayani 2010b).

The firm's age, or the period counted since the IPO on the stock market, is positively correlated with the quality of corporate governance, and, consequently, lowers the agency costs and the cost of the bank loan (Kieschnick and Moussawi 2018). On the other hand, older firms usually accumulated retained earnings from the previous periods and may not strive for capital offered by the bank sector (Mac an Bhaird and Lucey 2010). Younger firms suffer more from agency problems, and this is the reason why access to external capital is hampered (Mac an Bhaird and Lucey 2010). As the firm gains experience and records a more extended credit history, the risk of moral hazard becomes lower.

Younger firms usually suffer from lack of capital, and for this reason, they often apply for external capital to finance their investment projects (Bhayani 2010b; Hall et al. 2004). At the same time, due to the problem of moral hazard, which is a very distinctive feature of young, technological firms, applying for and getting a bank loan is the way through torment (Hogan et al. 2017). Easier access to external capital for NTBFs is possible and can be observed in countries where the financial system is based on a well-developed banking sector. Therefore, we posit the following hypothesis:

**Hypothesis 6 (H6).** *The age of NTBFs located in emerging markets has a significant and positive impact on financial leverage.*
