The Cash-R&D Sensitivity In The Context Of Imperfect Financial Market

As the main body of technological innovation,a firm’s willingness and ability to innovate are crucial to national economy growth.Due to the characteristics of R&D innovation,firm needs to continuously invest a large amount of capital.Research based on developed capital markets shows that firms with more R&D investment tend to hold a large amount of cash.However,in a transitional economy like China,where financial market imperfection prevails,the market economy is not yet mature,and financing constraints are more prominent,which increases the propensity of firms to reserve cash for R&D investment.There are alternative financing channels for Chinese firms to facilitate external financing,such as equity stateownership and bank connection,so as to overcome obstacles to their own development.Therefore,what impact does the external financing facilitation channels(EFFCs)have on cashR&D sensitivity? In recent years,with the advancement of financial market reform,the external financing environments have been gradually improved,how will the effect of EFFCs brought by the imperfect financial market change? Research on the above issues will help us to understand firms’ cash holding policies of R&D innovation in the imperfect financial market,as well as to intuitively experience the actual effect of China’s financial deepening reform.Using a panel dataset covering all the Chinese A-share listed firms in Shanghai and Shenzhen from 2007 to 2018,under the analysis framework of information asymmetry,financing constraints,pecking order and credit rationing theories,we focus on equity stateownership and bank connection,to study their effect in China’s firm cash-R&D sensitivity,and their heterogeneity in the different external financial environment.The results show that:(1)As the two typical EFFCs,equity state-ownership and bank connection can effectively reduce firm’s external financing constraints,thereby easing the sensitivity of cash holdings to R&D investment.(2)With the advancement of the national financial reform,the intensified competition among regional banks and the balanced development of the credit market,firms have less financing constraints in R&D innovation,in other words,the effect of EFFCs in cashR&D sensitivity is weakened.After using IV-GMM and PSM to weaken the problems of reverse causality and sample self-selection in the model,the research results are still robust.Furthermore,this study also empirically tests the channel mechanism of EFFCs,shows that equity state-ownership and bank connection alleviate financing constraints by increasing credit availability and reducing debt financing costs,thereby reducing the cash-R&D sensitivity.This study comprehensively adopts the relevant theories and methods of corporate finance and regional economics to reveal the capital allocation logic of firm innovation.Furthermore,we enrich the literature of emerging economies in terms of corporate financing methods,technological innovation,and financial market operation.From the perspective of motivating firms to increase investment in innovation,our findings imply the positive effect of EFFCs on firm innovation financing in imperfect financial markets.From the perspective of improving the financial market,this paper has certain policy implications for the government to continue to guide and regulate the competition of financial institutions,such as commercial banks,and promote the balanced development of the credit market.