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

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.

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