Did financing constraints cause investment stagnation in Japan after the 1990s?

Has investment by Japanese firms been affected by financing constraints since the collapse of the asset price bubble? This study answers the question while improving on the weaknesses of the models used in previous studies. It employs panel data for Japanese listed firms in four R&D-intensive industries. We divide our sample by firm size and examine three periods with different economic environments: the first half of the “two lost decades” from 1991 to 2000, the second half of the ‘two lost decades’ from 2001 to 2009, and the period following the ‘two lost decades’ from 2010 to 2016. We construct new investment functions based on the Euler equation by considering both physical and R&D investment factors to remove estimator bias, thus enabling us to determine whether firms face financing constraints accurately. The estimation results indicate that there were financing constraints on both R&D and physical investments by large listed firms from 1991 to 2000 and from 2010 to 2016. Conversely, the weak growth of both R&D and physical investments by small listed firms from 2010 to 2016 was not attributed to financing constraints but the lack of productive investment opportunities. Different policy measures are needed depending on whether the investment is stagnant due to financing constraints or the lack of investment opportunities.     

Peer R&D disclosure and corporate innovation: Evidence from American depositary receipt firms

In this paper, we examine the effect of peer research and development (R&D) disclosures on corporate innovation. R&D disclosures can generate externalities for related firms, enabling those firms to better infer a project's likely payoffs and thus prioritize projects with higher net present values. We use a sample of foreign firms cross-listed on U.S. exchanges to investigate whether U.S. peer firms experience externalities from the cross-listing firm's R&D disclosures. We find that R&D disclosures by cross-listing firms are associated with greater innovation for industry peers in the U.S. market, especially when product market competition is high. The effect also varies with the home country's legal protection systems, disclosure environments, and accounting reporting rules. Cross-sectional analyses indicate that the externalities are more pronounced in industries or firms that rely more on external financing and firms subject to higher financial constraints; disclosures of higher quality appear to promote innovation by ameliorating financing frictions. Overall, this study provides evidence of R&D disclosure as an industry-wide determinant of innovation, thereby contributing to literature on the real effects of peer disclosures.     

R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment

We examine the intersection between corporate divestitures of tangible assets and investment in intangible capital (R&D) to provide new tests for the impact financing constraints have on real activity. A positive R&D sensitivity to asset sale proceeds indicates binding financing constraints since cash inflows from tangible asset sales are negatively correlated with productivity shocks and not otherwise connected to intangible investment via non-financial channels. Using a variety of estimation approaches, we document a strong, positive link between cash inflows from fixed asset sales and corporate R&D investment, but only among firms most likely facing binding financing constraints. These results offer robust evidence that financing frictions impact the increasingly important yet understudied intangible corporate investments that drive innovative activity, and they highlight a previously unexplored but potentially valuable use of proceeds from fixed asset divestitures.     

The finance of innovation in Latin America

This study contributes to the extant literature on innovation by examining how private companies fund innovation activities and R&D in Latin America. Specifically, this study seeks to identify whether innovative companies exhibit financing patterns different from those of non-innovative ones. In addition, this study aims at gauging the association between innovation and firm features, such as age, bank financing, female participation in ownership, financial constraints, and foreign ownership, among others.Based on information for Argentina, Colombia, Chile, Mexico, and Peru for 2010, firm size, firm age, financial constraints, and funding sources appear as the main drivers of innovation in Latin American countries. The figures also show that over 60% of the sampled firms displayed a very low or non-existent innovation level. A pending strategic task in Latin America is to increase both the R&D expenditure/GDP ratio and patent activities, and to attract highly-qualified researchers to industry.     

Government R&D spending,fiscal instruments and corporate technological innovation

Using panel data from 242 cities in China, we examine the impact of government research and development (R&D) spending on corporate technological innovation. We find that listed firms located in cities with higher government R&D expenditures are more innovative than firms in other cities. Further, the positive effect of government R&D spending depends on fiscal instruments and factor allocation. Through subsidies and tax incentives, government R&D spending enhances firm innovation by alleviating financing constraints, improving employee creativity and ensuring efficient operations. We demonstrate that subsidies are more effective than taxes in spurring corporate technological innovation. We also show that the impact of government R&D spending is stronger for state-owned and high-tech enterprises than for other enterprises. Overall, our findings suggest that government R&D spending can substantially improve corporate technological innovation through fiscal instruments.     

Cash holdings and R&D smoothing

The sharp increase in R&D investment in recent decades has important but unexplored implications for corporate liquidity management. Because R&D has high adjustment costs and is financed with volatile sources, it is very expensive for firms to adjust the flow of R&D in response to transitory finance shocks. The main contribution of this paper is to directly examine whether firms use cash reserves to smooth their R&D expenditures. We estimate dynamic R&D models and find that firms most likely to face financing frictions rely extensively on cash holdings to smooth R&D. In particular, our estimates suggest that young firms used cash holdings to dampen the volatility in R&D by approximately 75% during the 1998–2002 boom and bust in equity issues. Firms less likely to face financing frictions appear to smooth R&D without the use of costly cash holdings. Our findings provide new insights into the value of liquidity and the financing of intangible investment, and suggest that R&D smoothing with cash reserves is now important for understanding cash management for a substantial fraction of publicly traded firms.     

R&D and environmentally induced innovation: Does financial constraint play a facilitating role?

The improvement of sustainable economic growth is a necessity. One issue facing policymakers is facilitating green innovation. This paper constructs a model and explores the relationship between R&D expenditures and green patents, and investigates the impact of financial constraints on green innovation output. Based on the theoretical model assumptions and the data of listed companies in China from 2007 to 2019, this paper draws the following conclusions after the empirical tests: First, R&D expenditure is significant and drives green innovation as measured by green patents. Second, contrary to the positive relationship between R&D expenditure and green patents, financial constraints discourage green innovation. Third, financial constraints facilitate R&D investment efficiency, which results in enhancing the positive effect of R&D on green innovation.     

Green credit regulation,induced R&D and green productivity: Revisiting the Porter Hypothesis

This paper investigates the causal effect of green credit regulation policy on green productivity and revisits the Porter hypothesis. By separating R&D into environmentally induced R&D and production R&D, we find that green credit regulation policy significantly improves green total factor productivity (GTFP) growth rather than input-output TFP. We further show that environmentally induced R&D is the driver of GTFP, while production R&D significantly improves the input-output TFP. Finally, our estimations indicate that internal financing intermediation is used to finance environmental R&D projects due to the high cost of environmental innovation.     

Access to private equity and real firm activity: Evidence from PIPEs

We study how access to private equity financing affects real firm activities using a broad panel of publicly traded U.S. firms that raise external equity through private placements (PIPEs) between 1995 and 2008. The public firms relying on PIPEs are generally small, high-tech firms that cannot finance investment internally and likely face severe external financing constraints; PIPEs are by far the most important source of finance for these firms. We show that firms use PIPE inflows to maintain extremely high R&D investment ratios and to build substantial cash reserves. We also use GMM techniques that control for firm-specific effects and the endogeneity of the decision to raise private equity and find that PIPE funding has a substantial impact on corporate investment in cash reserves and R&D, and a smaller but significant impact on investment in non-cash working capital, but little impact on fixed investment or acquisitions. Our estimates indicate that R&D investment initially increases by $0.20–$0.25 for each dollar of private equity flowing into the firm, and that PIPE funds initially invested in cash ultimately go to R&D. These findings offer direct evidence that access to private equity finance has an important effect on the key input that drives innovation at the firm- and economy-wide levels.     

The size,concentration and evolution of corporate R&D spending in U.S. firms from 1976 to 2010: Evidence and implications

The use of research and development (R&D) spending as an empirical proxy for managerial discretion, information asymmetry and growth opportunities, is pervasive in empirical corporate finance research. Underlying this is the implicit assumption that firms choose levels of R&D to maximize value, given firm and industry characteristics. An alternative framework views the level of R&D spending as subject to idiosyncratic behavior as managers myopically manipulate R&D expenditures to meet short-term earnings goals. Using aggregate firm and industry level data, we find evidence consistent with the view that R&D is determined by firm and industry characteristics. Time invariant firm and industry fixed effects explain most of the cross-sectional variation in observed R&D spending, while time-varying factors like size, profitability, or market-to-book explain little of the cross-sectional variation. We find that R&D spending continues to grow faster than advertising and capital expenditures. We also find no evidence of managerial myopia as corporate aggregate R&D expenditures are growing faster than aggregate profitability and the number of firms that undertake R&D has increased over the period from 1976 to 2010.     

Cash holdings and the bargaining power of R&D-intensive targets

Prior literature suggests that R&D-intensive firms hold large amounts of cash due to financing constraints. This paper examines whether such firms could also use cash holdings as a strategic bargaining tool in M&A transactions. Using a large sample of takeover bids announced between 1980 and 2012, we demonstrate that cash holdings positively impact R&D-intensive targets’ takeover premiums and announcement-period abnormal returns. These effects disappear in non-R&D-intensive firms. Controlling for various endogeneity and financing concerns, we also find that R&D-intensive firms build up cash holdings in anticipation of becoming a takeover target. Further analysis indicates that in R&D-intensive firms, such cash holdings are valued highly by the market. Taken together, our findings shed new light on the strategic bargaining role of corporate cash holdings in the outcomes of acquisitions targeting R&D-intensive firms.     

How does the financial environment affect the stock market valuation of R&D spending?

This paper investigates the role of the financial environment in the stock market valuation of research and development (R&D) spending by firms. We examine the importance of equity financing relative to bank financing and the importance of both relative to the size of the economy on the stock market valuation of R&D expenditures. Empirical analysis of the Compustat Global Vantage firm-level data indicates that, the more market-based a financial system is, the more R&D expenditures are valued by the stock market. The degree of financial development does not appear to be important. Our results remain materially unchanged after controlling for numerous firm and country differences.     

深化增值税改革的市场反应及影响因素

运用事件研究法和多元回归法考察 “深化增值税改革”（2018年3月28日国务院常务会议）的市场反应及其影响因素。结果表明：尽管中美“贸易战”对股市产生了较大的负面影响,但投资者仍将“深化增值税改革”视为利好消息,且试点行业的市场反应都显著为正。从市场反应影响因素来看,研发支出越多、融资约束越强的公司市场反应更好。此外,进一步细分公司特征发现,高税收敏感度和高产品市场竞争程度的公司市场反应更加积极,存在超额雇佣且研发支出较高以及不存在超额雇佣但融资约束较高的公司市场反应也更加积极。     

Industry expertise on corporate boards

Recent surveys indicate that industry expertise is the most sought-after director qualification. Yet evidence on the value of such expertise is limited. This paper shows that firms that are difficult for non-experts to monitor and advise are more likely to appoint industry expert directors. Such appointments also depend on the supply of industry-experienced candidates in the local director labor market. Board industry expertise reduces R&D-based real earnings management and increases R&D investments. The increase in R&D spending is value-enhancing: firms with industry expert directors receive more patents for the same level of R&D, their R&D spending is associated with lower volatility of future earnings, and their value is higher. Finally, industry expertise is associated with CEO termination and pay incentives that encourage R&D investments.     

The Effects of Private Investments in Public Equity on R&D Investment in Small and Medium-Size Enterprises

This paper provides evidence that small and medium-size enterprises (SMEs) use a portion of private investments in public equity (PIPEs) for current research and development (R&D) investment, hold the rest in liquidity reserves such as cash assets and working capital, and ultimately use these reserves to smooth R&D investment. That is, PIPEs may have a direct effect on R&D investment and an indirect or smoothing effect using liquidity reserves. This paper also shows that innovative SMEs such as venture businesses, inno-biz firms, and management innovative firms are more likely to use PIPEs for R&D investment than are noninnovative SMEs. The implications of this paper are that PIPEs can be used as an important source of external financing to fund R&D investment and can be particularly valuable for R&D investment in innovative SMEs.     

A theory of growth and volatility at the aggregate and firm level

We present an endogenous growth model that explains the evolution of the first and second moments of productivity growth at the aggregate and firm level during the post-war period. Growth is driven by the development of both (i) idiosyncratic R&D innovations and (ii) general innovations that can be freely adopted by many firms. Firm-level volatility is affected primarily by the Schumpeterian dynamics associated with the development of R&D innovations. The variance of aggregate productivity growth is driven by the arrival rate of general innovations. Ceteris paribus, the share of resources spent on development of general innovations increases with the stability of the market share of the industry leader. As market shares become less persistent, the model predicts an endogenous shift in the allocation of resources from the development of general innovations to the development of R&D innovations. This results in an increase in R&D, an increase in firm-level volatility, and a decline in aggregate volatility. The effect on productivity growth is ambiguous.On the empirical side, this paper presents new cross-country evidence that R&D subsidies are not significantly associated with higher growth but are associated with lower aggregate volatility. It also documents an upward trend in the instability of market shares, a positive association between firm volatility and R&D spending, and a negative association across sectors between R&D and how correlated the sector is with the rest of the economy.     

How Do Financing Constraints Affect Firms’ Equity Volatility?

Theory suggests that financing frictions can have significant implications for equity volatility by shaping firms’ exposure to economic risks. This paper provides evidence that an important determinant of higher equity volatility among research and development (R&D)‐intensive firms is fewer financing constraints on firms’ ability to access growth options. I provide evidence for this effect by studying how persistent shocks to the value of firms’ tangible assets (real estate) affect their subsequent equity volatility. The analysis addresses concerns about the identification of these balance sheet effects and shows that these effects are consistent with broader patterns on the equity volatility of R&D‐intensive firms.     

Public market staging: The timing of capital infusions in newly public firms

We examine financing activities of newly public firms for evidence on capital staging in the public equity market. Staging (sequential financing) can increase issuance costs but can limit costs associated with overinvestment. We find evidence consistent with the hypothesis that staging is employed to help control the overinvestment problem in public firms. Initial public offering (IPO) proceeds, relative to external financing requirements, are smaller for firms with more intangible assets and more research and development (R&D)-intensive firms. Asset intangibility and R&D intensity are also both negatively related to the length of time from a firm's IPO to its first post-IPO capital infusion.     

Tax credit rating and corporate innovation decisions

The tax credit rating mechanism was formally implemented in 2014. As an important tax collection and management innovation, it has attracted the attention of regulatory authorities and scholars. Different from the literature that directly examines corporate tax compliance, we focus on the impact of tax credit rating implementation on corporate research and development (R&D) investment decisions. Using listed companies’ data from 2014 to 2019, we find that companies with higher tax credit ratings invest more in innovation, because the system helps managers identify R&D opportunities, alleviates corporate financing constraints and reduces agency costs. We confirm that tax credit ratings have manifold impacts on corporate information environments and business decisions, with better ratings positively affecting firms’ business decisions. This discovery can inform tax policy reform, encourage corporate innovation and construct social credit systems.     

The q-theory explanation for the external financing effect: New evidence

Several studies document a robust negative association between net external financing and average stock returns, which is referred to as the external financing effect. Using total asset growth as a comprehensive measure of overall corporate investment and total profitability gross of R&D expenditures as a measure of true economic profitability, we provide new evidence in support of the q-theory explanation for the external financing effect. We also test the market timing explanation for the external financing effect but fail to document supportive evidence.