Cost of Internal Equity and R&D Expenditure: Evidence from the American Jobs Creation Act of 2004

• In Event: Tax Reporting

Abstract

Prior studies debate whether the temporary tax holiday provided by the American Jobs Creation Act of 2004 (the AJCA) increased firm spending on domestic investment. Since research and development (R&D) is mainly equity financed, and the AJCA provides an exogenous shock to cost of internal equity for funding R&D, we hypothesize and find that on average, the reduced cost of accessing internal capital under the AJCA led to an increase in R&D expenditure. In addition, we find that the increase in R&D expenditure after the AJCA is higher for firms in high-tech industries that require greater R&D investment, and is higher for firms that rely more on equity financing.

Authors

• Qi Dong, Penn State University - Erie

• Xin Zhao, Pennsylvania State University at Erie