The R&D Tax Incentive as a Source of Funding for Early Stage Firms : Evidence From Australian Mining Exploration Entities

Prior research documents impediments to raising external equity finance faced by early stage and R&D firms. The capital structure literature predicts that these firms prefer to finance their projects with internal funds, with equity used as a last resort. We examine the 2011 changes to the R&D Tax Incentive (“R&DTI”) in Australia, which allowed small firms in a tax loss position to exchange a portion of their unused losses for a cash refund of up to 45% of their eligible R&D expenditure, potentially providing an alternative funding channel. Using a sample of 322 ASX-listed mining exploration entities (“MEEs”) receiving R&D tax refunds between 2008 and 2015, we find that the number of firms accessing the R&DTI increased significantly after 2011, as did the average refund received. The increase in R&DTI claims are concentrated in firms having previously disclosed a mineral resource or ore reserve. We find that R&D firms are generally less risky than non-R&D firms of comparable size. This is likely due to companies engaged in greenfield exploration (the most high-risk form of exploration) investing less in R&D compared to those conducting R&D around an existing mineral deposit