How do Firms Finance Their Research and Development Investments.

Abstract

This research examines R&D investment financing behavior of Pakistani firms and provides insight on contribution of various sources of finance in funding respective expenditure. Research uses sample of Pakistani firms in the time period 1995-2019. Results of Seemingly Unrelated Regression (SUR) model concludes that selected firms prefer to finance R&D investment primarily through internal source of finance i.e. cash reserves followed by external sources i.e. debt and equity. In terms of external sources, debt issuance precedes equity issuance in R&D expenditure financing while amongst types of debt issuance longterm debt issuance is preferred over short-term debt issuance. Findings are in line with Pecking order theory (Myers & Majluf, 1984) postulating that firms follow hierarchy in choosing sources of fund when financing investments however there is not strong evidence to state such as of insignificant coefficients. Quantile Regression (QR) results are analogous to SUR results however comparatively significant findings for R&D investment financing behavior is observed, indicating firms reliance on cash reserves as primary source of finance but with the exception that when provided with high level of R&D investment firms tend to rely more on long-term debt issuance followed by cash reserves while utilization of equity issuance remains minimum amongst all levels