Capital structure decisions and R&D investment: The contingency role of firm size

This paper explores how the size of a firm influences the relationship between capital structure choices and research and development (R&D) investment. By analyzing data from publicly listed U.S. pharmaceutical firms between 2011 and 2020 and using an instrumental variables regression, we present evidence that the impact of capital structure on R&D investment varies depending on firm size. Our findings show that firm size plays a critical role in shaping financing decisions to support R&D. Specifically, large and small firms employ different strategies for developing and implementing R&D projects. Our results reveal that R&D investment is negatively (positively) and significantly associated with debt financing (equity financing). Moreover, we show that firm size attenuates the adverse effect of debt financing on R&D investment and accentuates the positive effect of equity financing. Our study provides a refined distinction between debt and equity financing and clarifies the importance of structural characteristics in explaining a firm's R&D investment decisions. Our study assists policymakers and practitioners in designing effective policies to enhance the understanding of the complex relationship between capital structure decisions and R&D investment.