The effects of R&D tax credit and market competition policies on firms’ zero-leverage behaviour

Motivated by the characteristics of R&D and its co-movement with the rising prevalence of zero-leverage firms over the past four decades, we investigate the effects of US R&D tax incentive and import tariff policies on zero-leverage behaviour. We find that the number of R&D-intensive firms has increased since the introduction of the R&D tax credit in 1981, and that zero-leverage firms are disproportionately concentrated among R&D firms. Both the increase in R&D investment and the rising sensitivity of leverage decisions to R&D contribute to this pattern. In addition, intensified market competition driven by tariff reductions significantly increases the likelihood of zero leverage among R&D firms, but not among non-R&D firms. Overall, our findings suggest that R&D tax incentives and trade liberalisation policies have played important roles in shaping the long-term trend of zero-leverage behaviour in the United States.