How does the internal capital market influence R&D spending? New evidence

Abstract

PurposeThe purpose of this study is to examine whether and how internal capital markets mitigate financial constraints and enhance firms' willingness to engage in R&D projects.Design/methodology/approachThe study uses panel data relating to 2,095 publicly traded firms in the Chinese A-share market for the period 2007–2019. The tobit regression method is applied to explore R&D investment–cash flow sensitivity of group affiliates, while the systematic generalised method of moments and dynamic ordinary least squares models are adopted to address the endogeneity problem in the robustness test.FindingsThis study finds that firms affiliated with business groups demonstrate lower R&D investment–cash flow sensitivity than non-affiliated firms do and that R&D investments are significantly influenced by the cash reserves of other group members. In terms of financing channels, this study demonstrates that group firms use internal cash and equity financing to support other members' R&D investments, while debt financing does not influence member firms' R&D investments. In addition, this study discovers that R&D spending harms the stock and operating performance of some group members.Practical implicationsThe findings of this study enable business groups to focus on resource allocation and investment efficiency.Originality/valueAlthough prior studies indicate that internal capital markets can enhance R&D spending, few studies reveal the mechanisms through which internal capital markets benefit R&D. This study uses a unique methodology to test the ability of the internal capital market to enhance R&D spending. In addition, group firms use internal cash flow and equity financing to support partners' R&D projects.

Agribusiness diversification and technological innovation efficiency: A U‐shaped relationship

“…First, AD has the advantage of boosting the formation of an efficient internal capital market within an agribusiness firm (Kuppuswamy & Villalonga, 2016), which can mitigate financial constraints in R&D activities and contribute to TIE (Hsieh et al, 2010; Xiang, 2021). According to the internal capital markets theory (Shin & Stulz, 1998), subsectors of a diversified agribusiness firm have access to an internal capital market, which can provide optimal financing channels, such as internal cash flow and equity of other business units (Klein & Wuebker, 2020).…”

“…In contrast to external capital markets, corporate financial resources can be pooled and reallocated within the firm at high capital allocation efficiency levels because the general headquarters of diversified agricultural enterprises can make full use of information advantages and residual control rights (Klein & Wuebker, 2020). Ren et al (2021), Xiang (2021), and Tan et al (2018) find evidence that the internal capital market is conducive to stimulating R&D investments. Hence, diversified agribusiness firms can internally allocate limited financial resources to value‐enhancing R&D projects and ongoing R&D projects continuously and avoid overinvestment in innovation activities to achieve superior TIE (Gao & Chou, 2015).…”