Equity financing constraints and R&D investments: evidence from an IPO suspension in China

Purpose - The purpose of this paper is to exploit the effect of equity financing constraints on the firm’s investment in research and development (R&D) by utilizing a quasi-experiment in China. Design/methodology/approach - A difference-in-difference identification strategy is employed to test the treatment effect of the IPO suspension in China. For robustness testing, the authors incorporate cross-sectional variation in external financial dependence to identify the different influences an IPO suspension has on R&D investments for firms across multiple industries through the difference-in-difference-in-difference approach and the authors also adopt a matching approach to check the parallel trend assumption. Moreover, the authors introduce a placebo test to further verify the empirical results. Findings - Through the empirical analysis, the authors find that the firms subjecting to the IPO suspension are more likely to reduce their investments in R&D than those not affected by the IPO suspension. Besides, the negative effect of equity financing constraints on R&D investments is concentrated on external financial dependent industries. The firms in industries with larger external financial dependence tend to decrease more in their R&D expenditures when they experience the equity financing constraints. Research limitations/implications - This paper provides a new negative evidence on equity financing constraints on R&D investments link so that contributes to the debate about the effect of the financing constraints on R&D investments. Practical implications - The study provides a meaningful suggestion for governments to diminish the frictions in the financial market and to improve enterprises’ public financing circumstances by finding that equity financing constraints have negative impacts on firms’ R&D investments. Originality/value - There are some apprehensions around previous empirical studies investigating the impact of financing constraints on R&D investments as the existing literature is unable to provide an unambiguous method to exactly distinguish and measure the degree of financing constraints the firms confronting with. This paper solves this problem by first utilizing an IPO suspension in China as a quasi-experiment to examine the effect of equity financing constraints. Therefore, it gives insight to solve the problem of measuring financing constraints in future researches.