The determinants of R&D smoothing with asset sales: Evidence from R&D-intensive firms in China

Research and development (R&D)-intensive firms have strong incentives to maintain a smooth path for their R&D investments; otherwise, they will incur high adjustment costs. Examining data covering 2009 to 2016, we find that Chinese R&D-intensive firms, especially those with high innovation efficiency, tend to sell operating and financial assets to protect their value-enhancing R&D investments. However, financial constraints have adverse impacts on R&D smoothing with asset sales unless the firms have high innovation efficiency. The results suggest that innovation efficiency offers R&D-intensive firms, even financially constrained ones, a strong motivation to covert asset sales proceeds into R&D inputs, as the proceeds from asset sales provide a less-costly substitute for external financing. Given the importance of R&D for economic growth and the limited external financing opportunities in emerging capital markets like China, our findings reveal new insights regarding R&D financing.