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

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

Research in International Business and Finance, 2024, vol. 70, issue PA

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.

Keywords: Inefficient R&D investment; Over-investment in R&D; External financing sensitivity; Information asymmetry; Agency problem; Financial constraints; Real earnings management (search for similar items in EconPapers)
JEL-codes: M41 O16 O32 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:70:y:2024:i:pa:s0275531924001235

DOI: 10.1016/j.ribaf.2024.102330

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