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The determinants of R&D smoothing with asset sales: Evidence from R&D-intensive firms in China

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  • Liu, Duan
  • Li, Zhiyuan
  • He, Hongbo
  • Hou, Wenxuan

Abstract

Research and development (R&D)-intensive firms have strong incentives to maintain a smooth path for their R&D investments; otherwise, they will incur high adjustment costs. Examining data covering 2009 to 2016, we find that Chinese R&D-intensive firms, especially those with high innovation efficiency, tend to sell operating and financial assets to protect their value-enhancing R&D investments. However, financial constraints have adverse impacts on R&D smoothing with asset sales unless the firms have high innovation efficiency. The results suggest that innovation efficiency offers R&D-intensive firms, even financially constrained ones, a strong motivation to covert asset sales proceeds into R&D inputs, as the proceeds from asset sales provide a less-costly substitute for external financing. Given the importance of R&D for economic growth and the limited external financing opportunities in emerging capital markets like China, our findings reveal new insights regarding R&D financing.

Suggested Citation

  • Liu, Duan & Li, Zhiyuan & He, Hongbo & Hou, Wenxuan, 2021. "The determinants of R&D smoothing with asset sales: Evidence from R&D-intensive firms in China," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 76-93.
    • Handle: RePEc:eee:reveco:v:75:y:2021:i:c:p:76-93
    DOI: 10.1016/j.iref.2021.03.013
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    Keywords

    R&D financing; Asset sale; Innovation efficiency; Financial constraint;
    All these keywords.

    JEL classification:

    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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