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R&D investments: The effects of different financial environments on firm profitability


  • Karjalainen, Pasi


This study investigates the effects of a country's financial system on current R&D investments and the future profitability of the firm. My paper explores the association between R&D investments and the firms' future profitability in different financial environments. Empirical results from 10 countries reveal that as the proportion of a country's bank-based financing relative to market-based financing increases, the relationship between the R&D investments and the level of future firm profitability increases. Moreover, I find that the effects of R&D investments on the uncertainty of future firm profitability are similar in both market-based and bank-based financial environments.

Suggested Citation

  • Karjalainen, Pasi, 2008. "R&D investments: The effects of different financial environments on firm profitability," Journal of Multinational Financial Management, Elsevier, vol. 18(2), pages 79-93, April.
  • Handle: RePEc:eee:mulfin:v:18:y:2008:i:2:p:79-93

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    References listed on IDEAS

    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    2. Allen, Franklin & Gale, Douglas, 1999. "Diversity of Opinion and Financing of New Technologies," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 68-89, January.
    3. Booth, G. Geoffrey & Junttila, Juha & Kallunki, Juha-Pekka & Rahiala, Markku & Sahlstrom, Petri, 2006. "How does the financial environment affect the stock market valuation of R&D spending?," Journal of Financial Intermediation, Elsevier, vol. 15(2), pages 197-214, April.
    4. Boot, Arnoud W A & Thakor, Anjan V, 1997. "Financial System Architecture," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 693-733.
    5. repec:hrv:faseco:30747188 is not listed on IDEAS
    6. David E. Weinstein & Yishay Yafeh, 1998. "On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan," Journal of Finance, American Finance Association, vol. 53(2), pages 635-672, April.
    7. Asli Demirguc-Kunt & Ross Levine (ed.), 2004. "Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262541793, July.
    8. Allan C. Eberhart & William F. Maxwell & Akhtar R. Siddique, 2004. "An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases," Journal of Finance, American Finance Association, vol. 59(2), pages 623-650, April.
    9. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    10. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Funding growth in bank-based and market-based financial systems: evidence from firm-level data," Journal of Financial Economics, Elsevier, vol. 65(3), pages 337-363, September.
    11. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    12. Hall, Bronwyn H. & Oriani, Raffaele, 2006. "Does the market value R&D investment by European firms? Evidence from a panel of manufacturing firms in France, Germany, and Italy," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 971-993, September.
    13. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
    14. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, vol. 39(2), pages 179-209, February.
    15. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
    16. repec:bla:joares:v:38:y:2000:i:1:p:1-21 is not listed on IDEAS
    17. repec:hrv:faseco:30728041 is not listed on IDEAS
    18. Beck, Thorsten & Levine, Ross, 2000. "New firm formation and industry growth - does having a market- or bank-based system matter?," Policy Research Working Paper Series 2383, The World Bank.
    19. Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
    20. Randall Morck & Masao Nakamura, 1999. "Banks and Corporate Control in Japan," Journal of Finance, American Finance Association, vol. 54(1), pages 319-339, February.
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    1. repec:asi:ajoerj:2014:p:468-487 is not listed on IDEAS
    2. Adcock, Christopher & Hua, Xiuping & Mazouz, Khelifa & Yin, Shuxing, 2014. "Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 470-491.

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