Corporate Sustainable Growth and the Financing of Innovation: Evidence from Cash-Flow Disaggregation

Amani Kahloul and Ezzeddine Zouari
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Amani Kahloul: Institut Supérieur de Gestion de Sousse & Faculté des Sciences Economiques et de Gestion de Tunis, Tunis, Tunisia
Ezzeddine Zouari: Faculté des sciences économiques et de gestion de Sousse, Tunis, Tunisia

International Journal of Social Ecology and Sustainable Development (IJSESD), 2013, vol. 4, issue 4, 43-64

Abstract: R&D investments are a channel for growth, at the macro and micro levels. However, they are known to be characterized with high adjustment costs, therefore, it is generally admitted in the literature that firms try to smooth their R&D investments in face of shocks to internal finance, and the literature supposes that the observed investment – current cash-flow sensitivities are downward biased because R&D expenses are expected to respond to the permanent component of cash-flow but not to its transitory component. However, very few proofs, if at all, exist on the link between R&D and cash-flow components and its implications in terms of its contribution to the corporate sustainable growth. The authors decompose cash-flow into its permanent and transitory components and provide formal evidence that R&D- current cash-flow sensitivity is downward biased and that R&D- permanent cash-flow sensitivity better informs about the contribution of cash-flow to R&D smoothing, which shows a managerial commitment to sustainability. Unexpectedly, and in spite of the negligible observed sensitivities of R&D to the transitory component of cash-flow, the authors’ regressions reveal that these sensitivities have an asymmetric pattern: they are higher when cash-flow is expanding than when it is declining. This reveals a managerial preference for immediate growth, which jeopardizes sustainable growth, because of the risk of costly liquidation inherent to the reliance on the volatile transitory cash-flows.

Date: 2013
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