Divergent effects of external financing on technology innovation activity: Korean evidence

•We analyze various effects of external financing on firms' technology innovation activity (TIA).•Indirect external financing of bank loans makes a negative impact on TIA of the Korean firms.•Meanwhile, direct external financing of security issues makes a positive impact on it.

This paper explores a variety of effects of external financing subdivided into bank loans and bond and stock issues on the technology innovation activity (TIA) of Korean listed firms for the full sample period of 1st January 2000 to 31st December 2008. We find evidence that indirect external financing of bank loans makes a negative impact on TIA of the Korean firms whereas direct external financing of security issues does a positive one on it. The results support the hypothesis of manager discretion that banks' conservative lending criteria demanding considerable collaterals from firms discourage managers from an investment in TIA with high risk-high return while external financing via security issues grants managers more discretion for their TIA. This study building up the prior literature that primarily devote to an effect of internal financing on TIA of firms provides firm managers or academic researchers with valuable implications for evaluation of various impacts and roles of external financing in association with financing decisions for TIA of firms.