Innovative disruption and the choice between market and bank debt capital

Abstract

Innovative disruption stemming from the acceleration in technology-related innovations in the past two decades raises the question of how a firm’s choice between market and bank debt capital is affected. By applying logistic and fixed effect (FE) regression models to panel data of U.S. firms, observed during the period from 2006 to 2022, this study reveals that disruption risk leads to incumbent firms, ceteris paribus, relying more on bank debt financing. While it is not clear from these findings if credit risk is the only channel through which disruption affects debt choice, disruption risk is shown to increase credit risk. This research also finds that innovative disruption leads to proportionately more bank debt financing for more opaque firms, ceteris paribus. There is no evidence of firm-level innovation moderating the relation between disruption and debt choice.