Innovation and Investment in High-Tech Firms in Financially Constrained Environment

Abstract

Present study measures the effect of financing constraints on capital investment and innovation investment of Chinese firms from 2004-2015. Consistent with previous literature we use the sensitivity of investment to cash flow and sensitivity of innovation investment as a signal of financial constraints. Panel data estimation results lead us to arrive at three important conclusions. First; Chinese firms usually face financial constraints problems due to imperfect financial markets. Second; Chinese firms face investment cash flow sensitivity. Third; Chinese high-tech firms face innovation investment cash flow sensitivity. Hence, despite the financial efforts of the Chinese government, capital markets are still not efficient and create liquidity constraints. Results depict that firms classified a priori as more prone to financial constraints (based on KZ index) show higher sensitivity to cash flow.