Cash Holdings And R&D Investment

As the R&D investment has the characteristic of high adjustment costs, companies need tomake the R&D expenditure remain relatively smooth per period. However, the R&Dinvestments are generally faced with the financing constraints, and have high dependence oninternal cash flow. On the other hand, the internal cash flow is vulnerable to economicfluctuations. So it is a question worth thinking about that how does the company keep the R&Dexpenditure smooth. As the amount of the literature of that aspect is still small, this paper isthemed by the smoothing effect of cash holdings on R&D investment.Firstly, the paper talks about the financing constraints faced by the R&D investment with theAsymmetric Information Theory in capital market and theory of financing constraints. On thisbasis, the topic of this paper will be analyzed comprehensively and thoroughly. Secondly, wechoose486listed companies who have revealed R&D spending in the period2007-2011assamples and then build a multivariate regression model of panel data in order to test therelationship between the internal cash flow and the R&D expenditure of the listed company andthe role of the cash reserve in the R&D activity by the method of system GMM. The resultsshow that the relationship between R&D spending and the variation of cash holdings to issignificant negative, which means that the company will use cash holdings to smooth their R&Dinvestment so as to buffer the impact of cash flow instability to R&D spending and meet thedemand of sustainable, stable investment of R&D. In addition, the regression in different groups,which divided by the company size, show that the smaller the company size, the more importantof the cash holdings for the R&D investment.According to the findings, draw the following policy recommendations:1. Companies shouldstrengthen the awareness of cash management, establish a dynamic concept of cash managementand manage the cash more actively.2. Government should strive to improve our capital markets,increase financial, taxation, credit policy support and guidance for SMEs to ease the financingdifficulties.