The Effect Of Cash Holding On R&D Smoothing: Evidence From Listed Companies In China

In today’s society, the competition is becoming increasingly fierce, innovation has become the main driving force to promote economic development, and innovation is come from R&D. However, the disruption of R&D would lead to high adjustment costs. So keeping the stability of R&D expenditure is very important, and the enterprises have motivation to smooth R&D spending. R&D smoothing relay on stable financial support. But the information asymmetry, the height uncertainty of R&D, and the lack of collateral value will cause financial constraints; and at the same time, the enterprise’s internal cash flow may also be uncertain. So cashing is very important to smooth R&D spending as a capital buffer.This paper selects the listing corporation companies which have R&D activities in Shanghai and Shenzhen A shares from 2009-2013.By using the research methods of theoretical analysis and empirical analysis, this paper explore the effect of cash holdings on R&D smoothing.First of all, the paper puts forward hypotheses through theoretical analysis in three aspects to discuss the effect of cash holdings on R&D smoothing. In this paper, we discuss the motivation of R&D smoothing based on their adjustment cost; then combining with the characteristics of R&D, such as high risk and information asymmetry, we find financial sources of R&D, to investigate the role of cash holdings as the buffer pool; this paper also discusses the difference in the contribution of the enterprise as well as the degree of financing constraints on the research stage and development stage, and put forward the assumptions as the effect of cash holdings in different stages should be different; finally combining with financing constraints theory, the paper argue that the financing constraints have positive effects on the relationship of cash holdings and R&D spending.Secondly, the paper choose variables, and put forward the empirical analysis model, and carry out the descriptive statistical analysis and correlation analysis. Through the descriptive statistics, we find that R & D spending of China’s listing Corporation are small size, strongly Continuous and the characteristics of the industry are significant; at the same time the cash flow of China’s listing Corporation is volatile, and their the scale of equity financing is not high, and they also keep a large amount of cash. The paper also find that the degree of financing constraints of the listing Corporation have a large impact on the sources of financing and cash holdings.Finally, through the empirical test, we find several conclusion:(1) Internal cash flow and equity funds is the financial sources of R&D, and debt capital is negatively correlated with R&D expenditures(2) A change in cash holdings have a reverse effect on R&D expenditures significantly, explaining that the enterprise can release cash holdings to increase R&D spending. This confirmed that the cash holdings have a positive effect on the development of R&D smoothing.(3) Cash holdings has a smoothing effect on the research spending, but not significant on the development expenditures.(4) The higher the degree of financing constraints, the effect of cash holdings on research expenditure smoothing is larger; in the development expenditure model, financing constraints also has a positive regulatory role. And, when the enterprise is facing the high financing constraint, the effect of cash holdings on research expenditure is greater than on development expenditure.