Financing dependence, IPO and innovation investment of GEM listed firms

Abstract

Abstract: Scientific and technological innovation is a key dynamic of China′s economic development in the "New Normal" Economy, and the strategy of innovation-driven economic development has been put forward since 2012. Especially, corporate innovation is one of the most important parts of national innovation system. According to statistics, nearly two thirds of invention patents are applied by domestic firms up to the end of 2018 and present the trend of increasing year by year. Therefore, it is necessary to encourage corporate innovation and investment in research and development to implement the strategy of innovation-driven economic development.Although the existing studies show that not only many macro factors such as policy uncertainty, government subsidies and tax credit, but also many micro factors such as monitoring of board of directors, CEO incentives, transparency of accounting information of listed firms have influences on corporate innovation investment, it is easy for corporate innovation to face problems of financial constraints because of high risk of technological innovation. The studies aboard indicate that the development of capital market is helpful to promote corporate innovation investment because capital market will make firms′ financing to be much more convenient, but the research conclusions of effects of the development of domestic capital market on corporate innovation investment are very mixed. Why? It is worthy to further study the reasons that the development of China′s capital market would not improve corporate innovation investment. By using unbalanced panel data of listed firms on Growth Enterprise Market (GEM) between 2009 and 2014 and building Difference-In-Difference (DID) model, the paper has studied the effect of capital market on corporate innovation by analyzing the changes of corporate innovation after initial public offering (IPO) in order to discuss whether corporate innovation increases by easing its financial constraints or corporate innovation decreases because of its executives′ myopia behavior. Meanwhile, by considering the condition of corporate financing dependence, the differences of corporate innovation changes after IPO between internal financing dependent firms and external financing dependent firms have been empirically studied, and causes to different changes of corporate innovation have been analyzed by discussing the different level of venture capital investment. The main empirical results indicate that (1) the negative effect of IPO on corporate innovation investment is statistically significant, that is, corporate innovation investment decrease statistically significantly after IPO. It shows the executives′ myopia behavior which causes decrease of corporate innovation investment after IPO while it is not the easing effect of financing constraints to increase corporate innovation investment after IPO. (2) the decrease of corporate innovation investment in internal financing dependent firms is different from that in external financing dependent firms. The negative effect of IPO on corporate innovation investment in external financing dependent firms is statistically significantly greater than that in internal financing dependent firms, that is, the decrease of corporate innovation investment in external financing dependent firms is larger than that in internal financing dependent firms. It suggests that the executives′ myopia of external financing dependent firms is stronger than that of internal financing dependent firms. (3) Venture capital (VC) participation ratio and VC shareholding of external financing dependent firms are higher statistically significantly than those of internal financing dependent firms. VC could increase statistically significantly the negative effect of IPO on corporate innovation investment, the more the VC shareholding, the greater the negative effect of IPO on corporate innovation investment, and the sharper decrease of corporate innovation investment in external financing dependent firms which results from their higher VC participation ratio and VC shareholding. To be specific, VC increases statistically significantly the negative effect of IPO on corporate innovation investment in external financing dependent firms, while VC does not increase statistically significantly the negative effect of IPO on corporate innovation investment in internal financing dependent firms. It means that external investors such as venture capital investors have very strong motive to force firms′ executives to decease the highly risky innovation investment when they are inclined to withdraw from their invested firms after firms′ IPO, the more the VC shareholding, the greater the influence of VC on executives, and the sharper the decrease of corporate innovation investment.The above empirical analysis results have some policy implications. Though corporate financing is more convenient after IPO and firms to be listed are helpful to ease their financial constraints of corporate innovation investment, it is not necessary that firms should invest more in technological innovation after IPO. On the contrary, the regulator of capital market who focuses on the short-term profit indexes such as net income will put much pressure on firms′ executives and external investors to increase the short-term profitability, and will result in the higher correlation between the short-term profit index and the market price of the firm′s stock. Therefore, CSRC (China Securities Regulatory Committee) should use short-term profit index carefully to be the standard of stock market regulation whether the high-growth innovative technological enterprises are qualified to be listed or to be delisted from the stock exchange. And with the development of Chinese capital market, as for listed high-growth innovative companies, it is very important to initiate the concept of the valuation investment and foster valuation investors in order to raise the tolerance for failure of corporate innovation. These measures could be helpful to reduce executives′ impetus and pressure to pursue high short-term profit, and they could be helpful to raise executives′ enthusiasm and optimism to increase corporate investment in research and development. So the empirical evidences provide supports for the regulation of Sci-Tech Innovation Board to weaken the importance of firms′ short-term profit. That is, the regulator of Sci-Tech Innovation Board which is set up this year does not use short-term profit index as the most important qualified standards for being listed and being delisted from the stock exchange. It is optimistic that executives of listed firms in Sci-Tech Innovation Board will be enthusiastic to increase continuously their corporate innovation investment when they have no much pressure of high short-term profit. It is good for enhancing firms′ innovation and national independent innovation strength.

Key words: corporate innovation investment, financing dependence, IPO

Hu Yongping. Financing dependence, IPO and innovation investment of GEM listed firms[J]. Science Research Management, 2022, 43(3): 117-124.

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