The Comparative Analysis of the Speed of Adjustment to the Target Capital Structure of Innovative and Noninnovative BRIC Companies

The financial flexibility of a company is determined whether it has enough resources to optimize its current capital structure to the target one and how quickly it is able to respond to the changing macroeconomic conditions. This research paper is devoted to the comparative analysis of the adjustment rate between innovative and non-innovative firms operating in BRIC regions during the period from 2013 till 2017. The studied sample was decomposed into several subsamples by incorporating the life cycle stage and innovation criteria. It was found that innovative companies rely more on equity financing rather than debt compared to ordinary businesses. In terms of the adjustment process, it was investigated that both innovative and non-innovative firms consistently decrease its speed of adjustment towards the target capital structure along the life cycle stages. However, the SOA for innovative firms changes more drastically than for non-innovative ones reflecting the specifics of their business model and plunging costs of deviation from the target leverage ratio. Overall, the results obtained might be useful for financial managers of innovative firms providing empirical evidence on the type of financial behavior which is supposed to be employed at each stage of a firm's life cycle.