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External financing sensitivities and inefficient R&D investment: Evidence from China

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  • Chiu, Sheng-Hsiung
  • Lin, Tzu-Yu
  • Pan, Lu

Abstract

This study presents how a firm’s abnormal research and development (R&D) investment affects its external financing sensitivity. Using data from Chinese listed firms from 2009 to 2020, we find over-investment in R&D firms exhibits lower bank loan financing sensitivity to Tobin's Q (Q) and greater trade credit financing sensitivity to free cash flow. We attribute this finding to a phenomenon that managers (controlling shareholders) expropriate resources from shareholders (minority investors), which leads to increased cost of external debt finance by the firms it faces when the agency problem is growing worse. There is no evidence that supports the managerial motivations of financial constraints and real earnings management used to explain the differential external financing sensitivities to Q and free cash flow of firms with either over-investment in R&D or under-investment in R&D. Our findings are robust to using alternative model specifications, considering internal wealth variables, and executing the test for endogeneity.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:riibaf:v:70:y:2024:i:pa:s0275531924001235
    DOI: 10.1016/j.ribaf.2024.102330
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    1. Watson, Justin & How, Janice & Verhoeven, Peter, 2024. "Hedge fund activism, R&D efficiency and firm value," Research in International Business and Finance, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Inefficient R&D investment; Over-investment in R&D; External financing sensitivity; Information asymmetry; Agency problem; Financial constraints; Real earnings management;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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