The Importance of Economic System
This section sheds light for the importance of economics system on the relationships between R&D expenditures and equity financing and market timing. The analysis examines the differences between firms in market-based and firms in bank-based countries by controlling the role of the US firms.
To differentiate the effects of equity financing and mispricing on R&D, we create several interaction variables between these variables and the dummy variable representing the US firms and another dummy variable representing firms in Market-Based Countries Without US (MWUS). These variables also capture the role of bank-based system. If favorable market conditions, which provide firms better access to external financing in market-based countries, play important role in financing of R&D, then the coefficients of the interaction variables for market-based countries should be positive and significant. The previous section shows that the sensitivity of equity financing for financially constrained firms is higher than that for financially unconstrained firms. In this section, we should also observe that the sensitivity of equity financing should be higher for financially constrained firms in market-based countries.Table 6 presents the results for this analysis. First part of the table reports the results for the entire sample, and samples of financially constrained and unconstrained firms by using 2 models. Model 1 is for EqFin1 and Model 2 is for EqFin 2, respectively. The results for the entire sample show that the interaction variables between Cflow and the U S and MWUS are negative and significant. The coefficient of Cflow, however, is positive and significant. Since the magnitude of the coefficient of interaction variables is bigger than that of the variable itself, the U-shaped effect of internal funds is relevant for firms in market-based countries.
The coefficients of the interaction variables for both EqFin 1 and EqFin 2 with the US and MWUS are positive and significant as consistent with the expectations. The magnitudes of the coefficients of the interaction variables with MWUS are also higher than those of with the US firms. This evidence demonstrates that firms in market-based countries use more equity financing than firms in bank-based countries when they invest in R&D more, and this is not restricted only with the US firms. The coefficients of EqFin 1 variable are negative and significant, indicating that debt financing is more relevant for firms in bank-based countries. For mispricing opportunities, the results show that the coefficient of the interaction variables, MWUS*AdjMtoB, are positive and significant. While firms in market-based countries increase their R&D investment after high market valuation year, this is not true for firms in bankbased countries since the coefficients of AdjMtoB are not significant.Table 6 also examines the role of the importance of economic system for financially constrained and unconstrained firms separately. The results show that, as expected, firms in market-based countries use more equity financing, but the sensitivity of equity financing is higher for financially constrained firms. The estimated coefficients of MWUS*EqFin 1 (MWUS*EqFin 1) are 0.068 (0.022) for financially constrained firms and 0.013 (0.006) for financially unconstrained firms. This evidence is not strongly relevant for the US firms. The coefficients of US*EqFin 1 are very similar between financially constrained (0.022) and unconstrained (0.020) firms. The coefficients of US*EqFin 2 are 0.032 and 0.014 for constrained and unconstrained firms, respectively. EqFin 1 and EqFin 2 represent financing of R&D for firms in bank-based countries. The coefficients of these variables are 0.003 (not significant) and 0.014 for financially constrained firms, and -0.016 and -0.004 for financially unconstrained firms. This evidence for bank-based countries indicates that financially constrained firms use equity financing, but financially unconstrained firms use mostly debt for the financing of R&D. Finally, the coefficients of the interaction variable representing mispricing opportunities in market-based countries (MWUS*AdjMtoB) are very similar for financially constrained and unconstrained firms.