The dynamic evolution of Chinese firms’ cash holdings and R&D: external financing facilitation channels

We study the dynamic evolution of Chinese firms’ cash holdings and their relationship with R&D investment using a sample of companies listed in the Chinese A-share market. After introducing the exogenous events of the 2008 financial crisis and China’s ‘four trillion yuan’ monetary stimulus plan (2008–2010), we analyse the dynamic evolution of the relationship between firms’ cash holdings and R&D investment in the development of external financing facilitation channel effects from the perspective of two typical financing facilitation channels, namely bank relationship and equity state-ownership. The main findings are as follows: (1) Firms with higher R&D investments tend to hold more cash reserves. This positive correlation is affected by the economic and monetary conditions, which are changing constantly. The sensitivity of cash holdings to R&D investment plays a crucial role in explaining the dynamic evolution of Chinese firms’ cash holdings. (2) During the 2008 financial crisis, bank relationship and equity state-ownership significantly mitigated the positive relationship between firms’ cash holdings and R&D investments, which means that external financing facilitation channels had greater and more significant effects. Moreover, those effects decreased after the completion of the ‘four trillion yuan’ monetary stimulus plan.