Financial leverage and corporate innovation in Chinese public-listed firms

Abstract

PurposeThis study attempts to document the impact of financial leverage on corporate innovation in the Chinese nonfinancial public firms listed on Shenzhen and Shanghai stock exchanges.Design/methodology/approachThe firm-level data are collected from CSMAR database for ten years, ranging from 2007 to 2016. The authors have employed the panel fixed effects model and further system GMM approach for analysis. The sample is segregated on the basis of state (SOE) and nonstate ownership (NSOE) to check for the diverse effects. In total, three different proxies of financial leverage are used to unearth the varying impact of short-time and long-term leverage separately. Further, corporate innovation is divided into input innovation (R&D/Sales and R&D/Assets) and output innovation (patents and inventions).FindingsThe results suggest that financial leverage is detrimental to the input innovation while conducive for the output innovation when measured by the number of patents. Contrarily, leverage has a negative influence over the output innovation when measured by the number of inventions. This implies that leverage is more damaging for the highest form of innovativeness (inventions) in China. Input innovation is more sensitive to the changes in long-term leverage versus short-term leverage. Further, the authors find that innovation in SOEs is more sensitive to the changes in the leverage as compared to the NSOEs. The results are free from the threat of endogeneity and identification problems, as reported by the system GMM model.Research limitations/implicationsThe authors did not segregate the sample on the basis of industry/sector.Practical implicationsThe firms pursuing a strategy of radical innovation should try to keep their debt levels lower in order to achieve a higher innovation performance. Although, a rise in the leverage may mean an increased access to finance for a firm but such an access comes at a cost in the form of damage to the corporate innovation. However, increased debt financing may not be so bad for the firms that want to achieve a moderate and not the highest level of innovation. Such firms can produce recurring and synergic effects with debt financing and moderate innovation, once they achieve a level of innovation performance that satisfies their financiers.Originality/valueTo the best of authors’ knowledge, this is probably the first study to check the impact of firm-level financial leverage on both input and output innovation in the Chinese public-listed nonfinancial firms' panel data perspective till now.

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“…Innovation performance ( IP ). Scholars have mostly used the number of patents as a proxy for innovation performance (Jia et al , 2019; Iqbal et al , 2020). But given that patent grants require tests and annual fees, there exists much uncertainty, and a patentable technology is likely to influence firm performance before the patent is granted.…”

“…Control variables. This study controlled for the following variables (Balkin et al , 2000; Artz et al , 2010; Chen, 2014; He and Shen, 2019; Jia et al , 2019; Iqbal et al , 2020): firm size , measured by the natural logarithm of the total number of employees; firm age , measured by the number of years from the firm establishment date to the observation date; capital structure , measured by the ratio of total liabilities to total assets at year's end; ownership , if the firm is a state-controlled firm, the value is 1, otherwise it is 0; assets turnover , measured by the ratio of sales revenue to the average of beginning total assets and ending total assets; intangible assets , measured by the ratio of intangible assets to total assets; subsidies , measured by the natural logarithm of the amount of government subsidies (including fiscal appropriations, fiscal interest subsidies and tax rebates); knowledge capital , measured by the ratio of the number of science and technology personnel to the total number of employees; R&D , measured by the ratio of the R&D spending (including expended and capitalized R&D spending) to the total assets of the firm; attainment discrepancy , measured by the extent to which the firm's actual performance falls short of the aspiration, the actual performance is measured by ROA and the level of aspiration is measured by ROA of the previous year; TMT size , measured by the total number of members on the TMT; market competition , measured by the Herfindahl-Hirschman Index, which reflects the market shares of listed companies in the industry. To control endogeneity, the independent variables, moderating variables and control variables were all those of period t , while the dependent variable was that of period t +1.…”

“…Innovation is a driver of economic growth and a determinant of long-term competitiveness for a country (Porter, 1992). On a micro level, innovation is not only conductive to building the temporary competitive advantage (D'Aveni et al , 2010; Iqbal et al , 2020), but also a key source of sustainable development and crucial for the survival and development of firms (Chen et al , 2015; He and Shen, 2019; Rejeb et al , 2019). Firm innovation constitutes the micro-level foundation for national innovation; hence, exploring how to foster and stimulate firm innovation is important for boosting the long-term stability and growth of national economy and the sustainable development of firms (Liu et al , 2019; Zhang et al , 2021).…”

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“…The emergence of financial distress reflects the poor management of enterprises, and the internal capital flow can not support the normal operation of enterprises. To avoid more serious losses caused by financial distress, enterprises have to start to try new strategies to ''save resources and flow'' (Iqbal et al, 2020). On the other hand, the increase of financial leverage will aggravate the bankruptcy risk of enterprises.…”

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“…Therefore, the Hausman specification test (HST) resulted that the fixed effect model is more suitable for use than the random effect model in predicting the results of hypothesis testing. However, some researchers conducted tests using the generalized method of moments (GMM) (Bolarinwa & Adegboye, 2020;Etudaiye-Muhtar & Abdul-Baki, 2020;Haron, 2016;Iqbal, Xu, Fareed, Wan, & Ma, 2020;Rani et al, 2019). This is due to the frequent cases of endogeneity in financial studies.…”