This paper analyzes why high-tech firms are less likely to have debt in their capital structure. The share of zero-leverage firms increased in the US in the Software & Services, Hardware Equipment and the Pharmaceutical & Biotechnical industries which are treated as high-tech firms in our research. We divide the sample of US-based firms from the RUSSELL 3000 index for the period from 2004 to 2015 into two groups, one of them includes only high-tech firms, another contains all other firms from the sample. Traditional determinants of corporate structure such as size, age, asset tangibility, profitability and market-to-book ratio cannot fully explain why high-tech firms choose a zero-debt policy. We found that high-tech firms are more financially constrained than non-high-tech firms. The managerial entrenchment hypothesis could not predict zero-leverage for high-tech firms, but it can partially predict the debt conservatism of non-high-tech firms. The evidence shows that the excess cash hypothesis explains why unconstrained high-tech firms have zero-leverage but does not explain it for non-high-tech firms. Finally, we did not find a significant influence of the financial flexibility hypothesis for the decision of unconstrained high-tech firms to be unlevered, while for their non-high-tech counterparts this hypothesis fits.

The recent increase in the share of zero-leverage firms is most pronounced in the Software and Services, Hardware Equipment, and Pharmaceutical and Biotechnical industries. The reasons for these industries’ conservative debt policies are not fully disclosed. How companies in technological sectors manage to perform well attracting no debt and loosing debt tax shield benefits is a mystery. This study aims to determine why high-tech firms are less likely to have debt in the capital structure. On the basis of a sample of US-based firms from the RUSSELL 3000 index for 12 years, we show the factors leading to a zero-debt structure. After dividing the sample into high-tech and non-high-tech subsamples, we demonstrate the gap between zero-debt motives for technological and traditional sectors. We show that the common determinants of corporate structure cannot fully explain why high-tech firms choose a zero-debt policy. Testing the possible motives of debt financing avoidance, we find that high-tech firms are more financially constrained than non-high-tech firms. We further show that unconstrained high-tech firms may avoid debt to maintain their financial flexibility. On top of that, managerial entrenchment also adds to the zero-leverage choice of high-tech companies. The study results are helpful for executive management teams and investors since they shed light on the specific style of financing choice for technological firms.