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Top1. Introduction
The transformation of the firm from a “mere economic-entity” to an entity that is obliged to take into account new aspects such as: the social and environmental aspects as well as the economic aspect, forces firms to rethink their development strategies, not only in a rationale of maximization of firm’s profit or wealth, but rather to think in terms of sustainable growth, which we define based on the Brundtland Commission as development that meets the needs of the present without compromising the future. And this is all the more true for technological firms and their R&D investments, which are recognized as an important driver of growth, at the macro level as well as the firm-level (Brown, Fazzari & Petersen; 2009 provide a useful link between finance and growth through innovation efforts).
For the R&D investments to help sparking and keeping corporate sustainable growth, they must be driven by sustainable management practices, namely “reasonable” finance channels. Huang and Liu (2009) argue that “the financial idea of the sustainable growth means the actual growth of the enterprise must be harmonized with its resources”.
R&D investments have special characteristics. In fact, they are known to be characterized with great information asymmetry on financial markets. This information asymmetry comes from the risky nature of the R&D activity itself and of the innovation-based capital investments, which prevent outside investors from making accurate appraisals of the investments value. These information asymmetries are also often deliberately maintained by firms, for strategic considerations. In fact, R&D activities are highly competitive and information leakage to competitors may have heavy consequences on the firm. Therefore, innovative firms face severe adverse selection problems on the equity and debt markets, which make external financing costly, if available at all. These problems are further compounded on the debt market by the poor collateral value of R&D and R&D-related projects and by the bankruptcy risk. All those aspects make R&D-intensive firms very dependent on internal finance or to be more precise on permanent internal finance. In fact, Himmelberg and Petersen (1994) argue that R&D expenses are predominantly payments to highly-trained engineers and qualified scientists and specialists, who embody the knowledge capital of the firm. Hiring and firing them is very costly, that’s why R&D are considered as having high adjustment costs; consequently they only respond to permanent cash-flows, not to transitory shocks to cash-flows.
The issue of R&D financing has always been studied in the framework of the investment- cash-flow sensitivity literature, which is one of the largest and oldest bodies of corporate finance. In the previous twenty years, it has driven a flow of studies on R&D investments that helped us understand several aspects of R&D financing features. However some other characteristics of the R&D financing pattern remain ambiguous. In fact, while most R&D researchers agree that R&D response is downward biased and that R&D react to permanent cash-flows but not to transitory shocks in cash-flows, these assertions, have never been proved empirically (except the pioneer work by Himmelberg and Petersen (1994)) and very little is known about the way permanent cash-flow influences R&D and therefore corporate sustainable growth or the real amplitude of the R&D investments’ response to permanent and transitory components of cash-flows. Our contribution is to fill in this gap and accordingly, we address the following research questions: 1) To what extent are the R&D-current cash-flow sensitivities downward biased? 2) What are the characteristics of the R&D sensitivity to the permanent and transitory components of cash-flow? 3) To what extent do managers follow sustainable management practices in order to achieve corporate sustainable growth?