An Empirical Research Of R&D Investment On Zero-Leverage Financing Strategy

Since the MM theory was proposed nearly 60 years ago,scholars in the field of financial studies have been devoted to exploring the optimal financial leverage ratio of the company and have put forward various theoretical analysis and model prediction.However,in the real world,the debt issued by the company is always lower than the optimal ratio predicted by the theoretical model.Low-leverage companies are wide-spread in the capital markets and there are even companies that don't choose any interest-bearing debt when they conduct external financing,so they are called zero-leverage companies.When making financing decisions,zero-leverage companies abandon the interest from holding the debt completely,which is contrary to the classical capital structure theories that propose the company should hold moderate debt to maximize its value.The choice of the company of not being in debt poses a challenge to the study of capital structure,which can not make a reasonable explanation for the zero-leverage financing phenomenon.As a �corner solution� to solve the problem of capital structure,the zero-leverage financing strategy has attracted wide attention from scholars because of its particularity.The motivation behind the use of this extreme financing strategy is a puzzle that the academic community has been trying to explore.Based on the theory of industrial organization,we find that there are many zero-leverage companies in various industry in China.The proportion of the zeroleverage companies in information transmission software and information technology service industry and scientific research and technology service industry are higher than that of other industries.These two industries have higher requirements on the technological innovation ability of the company,while this ability is determined by the amount of research and development investment.Thus,we want to explore that whether the companies with larger R&D investment are more likely to choose the zero-leverage financing strategies,and what is the underlying mechanism?This paper takes a sample of Chinese listed companies during the period of 2012-2018 to explore the influence of R&D investment on the choice of zero-leverage strategy and test the internal mechanism of R&D investment on extreme financing choice with the mediating effect analysis method.On the one hand,considering the preferential tax policies for the R&D investment,the policy of additional tax deduction before tax for R&D expenses in China has been implemented since 1996 and has been continuously improved in recent years,which has expanded the deduction ratio,statistical caliber and applicable scope of R&D expenses.Under this policy,enterprises will be more active in tax planning by using R&D investment.Thus,companies with higher R&D investment are more tended to use the current policy and regulations to avoid tax.Active tax avoidance not only reduces the cash expenditure of enterprises,but also replaces the interest of debts tax shield with the non-debt tax shield.Then the enterprises may actively choose the zero-leverage strategy.On the other hand,based on the information asymmetry theory,enterprises disclose less information to the outside world due to the highly confidential nature of the technology when they conduct research and development,so they will face a higher risk premium when they look for the external financing.In addition,the research and development investment activities generally need a long cycle and high conversion cost and the value of the achievements is uncertain.The uncertainty of investment returns also further increases the difficulty of financing,which making enterprises face greater financial constraints.Therefore,the companies with larger R&D investment are more inclined to face financial constraints and which will force enterprises to choose the zero-leverage financing strategy.Through the theoretical analysis and empirical test,our study finally find that companies with higher R&D investment are more likely to choose zero-leverage financing strategy,and prove that corporate tax avoidance and financial constraints play a part of intermediary role in this process asa transmission mechanism.The research contributes to understanding the reasons why the listed companies with higher R&D investment choose the zero-leverage strategy fundamentally,and provides theoretical basis for such extreme financing choice.