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Financial market imperfections and sensitivity of cash holdings to R&D investment: Evidence from chinese listed firms

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Listed:
  • Liu, Duan
  • Wang, Chen
  • Zhang, Hui
  • Yao, Shujie
  • Li, Zixin

Abstract

Previous studies on developed economies have shown that firms with more research and development (R&D) activities tend to hold more cash. In a transitional economy, such as China, where financial market imperfections prevail, the likelihood of firms reserving cash for R&D is even higher. This study identifies two alternative credit financing channels, equity state-ownership and bank connection, that can be used by Chinese listed firms to raise external funds and mitigate the market imperfection problem. Typical external financing facilitation channels (EFFCs) effectively mitigate financial constraints through reducing information asymmetry between firms and creditors, alleviating R&D dependence on cash holdings. However, as China’s financial reform deepens, market environment improvement weakens the EFFC effect. Hence, this study deliberates on the mechanisms by which the EFFC effect may be reduced, leading to useful policy implications for financial market reform in China to abate innovation costs.

Suggested Citation

  • Liu, Duan & Wang, Chen & Zhang, Hui & Yao, Shujie & Li, Zixin, 2023. "Financial market imperfections and sensitivity of cash holdings to R&D investment: Evidence from chinese listed firms," Research in International Business and Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923001514
    DOI: 10.1016/j.ribaf.2023.102025
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    Cited by:

    1. Li, Yan & Zhang, Yiren & Hu, Jian & Wang, Zeyu, 2024. "Insight into the nexus between intellectual property pledge financing and enterprise innovation: A systematic analysis with multidimensional perspectives," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 700-719.
    2. Cui, Wenxin & Qiao, Cuixia, 2024. "Customer structure and R&D investment: Based on innovative trait," Finance Research Letters, Elsevier, vol. 66(C).
    3. Moon, Byunggeor, 2024. "Innovative or complacent: The impact of financial conditions on firms’ strategic innovation activities—A game-theoretical approach," Research in International Business and Finance, Elsevier, vol. 71(C).
    4. Chiu, Sheng-Hsiung & Lin, Tzu-Yu & Pan, Lu, 2024. "External financing sensitivities and inefficient R&D investment: Evidence from China," Research in International Business and Finance, Elsevier, vol. 70(PA).
    5. Li, Xiao-Lin & Si, Deng-Kui, 2024. "Does financial market liberalization promote corporate radical innovation? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 95(PB).

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    More about this item

    Keywords

    Financial market imperfection; Cash-R&D sensitivity; External financing facilitation channel (EFFC); Chinese listed firms;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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