How do Chinese TMT firms deploy their resources in R&D and S&M after
their IPOs?
Abstract: To help understand how Chinese TMT firms develop innovation capabilities under a highly competitive international environment, this paper studies their resource deployment strategies after their IPOs by analysing the changes in R&D and S&M intensities and the impact of overseas listing. After examining the 5-year data of 63 foreign-listed and 104 domestic-listed Chinese TMT firms that went public between 2000 and 2018, my first finding is that Chinese TMT firms increased their resource allocations in both R&D and S&M activities after obtaining newly raised capitals, in near identical proportionality. Moreover, overseas listing can exert a positive influence on Chinese firms’ spending behaviours, mainly due to the stringent shareholder protection regulations. Lastly, the deployment strategies of both groups, however, did not boost their firm value. Overall, Chinese TMT companies currently are still in the improvement stage and do not have the innovation ability to be the first ones to seize the market and reap profits.
Key words: Resource deployment strategy, Innovation Capability, Chinese firms, Research and Development (R&D), Selling and Marketing (S&M), Initial Public Offering (IPO), the Technology, Media, and Telecom industry (TMT)
University of Groningen Faculty Economics and Business MSc in International Financial Management
2021 January
1. Introduction
R&D capabilities have long been recognized as one of the main driving forces for a country’s productivity and economic development (Solow, 1957; Wang et al., 2013). Similarly, it is also a crucial factor for companies to improve their competitiveness in an international environment. A firm’s internal innovative competence is a valuable asset for its long-term business growth (Peteraf, 1993; Ettlie, 1998; Helfat and Peteraf, 2003), especially in the innovation-intensive sectors such as the technology, media, and telecom (“TMT”) industry. Currently, TMT firms have been facing growing inter-industry and intra-industry competition (PwC, 2018), as well as the challenge of shortening product life cycles (Artz et al., 2010). Thus, a stronger deployment commitment to innovation is essential for them to survive and succeed in a highly competitive environment (Kor and Mahoney, 2005).
and S&M and whether they can obtain the maximum benefit, especially in the innovation-intensive industry such as TMT, have become questions worthy of discussion.
China, as the second largest economy, has been receiving great attention by academics, since the uniqueness of its legal and economic environment makes it an important counterexample to the findings in finance and corporate governance literature (Allen et al., 2005). Since early 2000, the Chinese government has been emphasizing the importance of developing indigenous innovation capabilities and encouraging Chinese firms to increase their spending on R&D by issuing various preferential policies such as tax incentives (Vinig & Bossink, 2015; Jiang, 2016). Nevertheless, whether acquiring external technology through merge and acquisition (“M&A”) or improving internal innovative skills through increasing R&D expenses, Chinese firms need to have two key resources to achieve a higher success rate, which are highly qualified technicians and sufficient capital (Chesbrough, 2003; Enkel et, at., 2009).
Capital, on the other hand, also determines the outcome of a firm’s future innovation. As argued by Ettlie (1998), a country’s economic growth depends on its innovations, and a firm’s innovative development depends on leverage. Although China, as an important player in the global market, has been experiencing tremendous changes during the past few decades, there is still a significant gap between its capital markets and those in the developed countries. For instance, due to its underdeveloped debt market, the cost of bank loans in China was about 36% higher than the financing cost through equity issuing, according to a survey conducted by Ding et al., (2010). For its equity market, the Shanghai Stock Exchange and the Shenzhen Stock Exchange were established in 1990 and 1991 respectively, which is regarded as an important step towards market reform and privatization. However, the main motivation for it is to alleviate governmental funding burden, enable state-owned enterprises to raise funds externally and improve their financial performance (Green 2003; Chen, 2005).
After joining WTO in 2001, the Chinese capital markets are gradually gearing to international standards. By the end of 2009, the Growth Enterprise Market (“GEM”), a Nasdaq-style exchange, was launched by the Shenzhen Stock Exchange. Although it aims to raise capital for innovative enterprises firms by lowering the listing requirements of earnings, many Chinese TMT companies are still seeking to directly issue their shares on overseas exchanges (Li, 2019). This is likely due to the unique advantages of overseas listings, such as a more mature investor base, a more effective institutional environment and a good reputational effect (Yang & Lau, 2006; Ding et al., 2010). From 1998 to 2018, there were a total of 100 Chinese TMT firms that launched their IPOs outside of the Mainland China, according to SINA Finance1. These companies are mainly concentrated on the Nasdaq and New York stock exchanges in the US, as well as the Hong Kong Stock Exchange2. According to the data provided by the Shenzhen Stock Exchange, 152 Chinese companies in the TMT field were publicly listed on the GEM after its launch until 2018.
In summary, it would be interesting to examine the deployment strategies regarding R&D and S&M activities of Chinese TMT firms after their IPOs. More specifically, with newly raised capitals, how will they allocate resources in S&M and R&D activities to improve their
1 SINA Finance is one of the largest news sites in China that provides financial and business information.
innovative capabilities? What is the impact of overseas listing on their deployment strategies? And are their strategies effective in terms of gaining value?
By studying the 5-year of data from 63 foreign-listed and 104 domestic-listed Chinese TMT firms that went public between 2000 and 2018, I found that these two groups of firms both increased their R&D and S&M expenditures after their IPOs, in near identical proportionality. To address the concerns that the increase in R&D and S&M after listings is driven by pre-existing trends, a dynamic effect test was performed, and the outcome supports the conclusion. This result strongly demonstrates the enthusiasm of Chinese firms for future innovation.
The deployment strategies of Chinese TMT firms for both groups, however, did not boost their firm value. The reason may be due to the poor intellectual property protection regulations in China and the firms’ weak ability to attract top engineers and technicians. Besides, investors, in general, place more value on a firm’s technological competitiveness and new product introduction over regular advertising activities.
Apart from the main findings mentioned above, the results from control variables also offer interesting insights. For example, the science-related background of decision makers can not only influence the strategic decisions of R&D expenditure, but also affect the level of S&M investments. In addition, institutional investors such as pension funds also exert significant impact on the firm’s resource allocation although their ownership percentage is relatively low.
Overall, this paper contributes to the current literature mainly in three areas. Firstly, this paper examines Chinese TMT firms’ deployment strategies and its effectiveness after their IPOs by linking R&D and S&M activities, which are usually less well researched. Secondly, this study highlights the impact of overseas listing on the deployment strategies of Chinese TMT companies, which can also offer some insights for other firms in emerging market. Lastly, this paper attempts to alleviate accounting bias in terms of R&D reporting3 and use S&M expenses instead of General and administrative expenses (“SG&A”)4 in order to deliver more accurate results.
3 Please see footnote 9.
The remainder of the paper proceeds as follows. Section 2 discusses three main hypotheses based on relevant theories and previous literature. Section 3 describes the empirical specifications and the data employed in this paper. Section 4 presents and analyses the results of the regressions. Section 5 is the conclusion which includes the main findings, limitations, an additional robustness test, and the implications for future research.
2. Theories and Hypotheses
2.1. R&D and S&M Deployment Strategies of Chinese TMT Firms
for regional governments on local R&D investments and by introducing certain tax incentives and export subsidies for Chinese firms.
Although some of these policies violate WTO rules and create an unfair competitive environment for companies from other countries, many foreign multinational corporations, such as Pfizer and Microsoft, still choose to support the Chinese innovation development due to the huge potential of the local market. According to the finding of Abrami et al. (2014), the number of foreign R&D centres in China had doubled in 2010 since 2004. For this reason, emerging markets, such as China, who are initially more reliant on external know-how from developed countries, can have a certain level of advantage in cultivating their own innovative skills. Chinese companies do not need to start from scratch, as the knowledge inflow provided by their foreign counterparts through foreign direct equity investments can be utilized as a solid base for new innovative ideas and discoveries (Jiang, 2016).
been unable to enter the Chinese market and therefore cannot provide any technological knowledge.
Confronting the limitations mentioned above, Chinese TMT firms face greater challenges to achieve the “do it yourself” shift. Currently, cross-border mergers and acquisitions are a common strategy for them to fill the main gap in innovation capabilities with developed countries (Deng, 2009; Li et al., 2016). The success of Lenovo’s acquisition of IBM’s PC division in 2005 and the Chinese government’s encouragements lead to more overseas investments in the following years (Deng, 2009; Abrami et al., 2014). Nevertheless, the real challenge is after the M&A. Regardless of whether they are able to acquire new technologies externally, Chinese companies need to have two indispensable resources if they want to become a leading force for innovation in the world. These two pre-conditions are sufficient capital and the brightest workers in the industry, since they are vital for absorbing new information effectively and transforming it into real products (Chesbrough, 2003; Enkel et, at., 2009). As discussed in the Introduction section, Chinese TMT firms usually address their capital constraint issue through equity issuance. Attracting outstanding talents, however, may be a more demanding task for the majority firms considering their current competitive position and reputation.
It can not only boost future sales but also enhance the brand image, thus further increasing the probability of recruiting high-quality employees (Turban & Cable, 2003; Knox & Freeman, 2006). Second, conducting S&M activities are an effective approach to obtain market knowledge, which is critical to exploit new market opportunities and capture value for innovations (Li & Calantone, 1998; Samiee & Walters, 2003). In other words, before and during the product development process, companies need to have a clear understanding of the targeted market, which usually requires the undertaking of extensive market activities (Chesbrough, 2003). Tsai and Eisingerich (2010) also argue that marketing ability is an essential component of companies in emerging markets to successfully enter the global market and compete with more technologically advanced firms from developed countries. Therefore, market capability, which emphasizes knowing how to apply market information to enhance internal analysis and delivery processes, is positively and closely linked to a firm’s innovation performance (Tsai & Eisingerich, 2010).
In short, S&M activities are critical to every step as they are the basic foundation for R&D and subsequent sales. Chinese firms, after their IPO, may initially choose to increase their spending on S&M to improve the firms’ reputation and attractiveness when considering their disadvantages in the international talent market. Meanwhile, improving their knowledge of their existing and potential markets may also be their priority in order to carry out new research projects later on. Taken together, the first hypothesis as follows:
2.2. The Impact of Overseas Listing
Listing overseas is considered a double-edged sword. A number of scholars find that emerging market firms that are listed in developed countries can benefit from a lower cost of capital and a more positive reputational effect due to the large international investor base (e.g. Pagano et al., 2002; Certo, 2003; Humphery-Jenner, 2012; Karolyi, 2006 & 2012). Besides, the stringent legal environment and accounting standards in developed economies can facilitate those firms to improve their corporate governance and financial performance (Luo et al., 2012). However, these demanding requirements and the high costs of monitoring and disclosures induce some firms to choose domestic stock exchanges with a less stringent regulatory environment (Doidge et al., 2009). Ayyagari and Doidge (2010) also show that firms from a weaker legal system with a more concentrated ownership are less likely to pursue overseas lPOs.
of investors will force firms to disclose more detailed information and thus increase information transparency (Shleifer and Wolfenzon, 2002; Xiao, 2013). Therefore, the management of Chinese TMT companies that are listed overseas is less likely to pursue personal interests and overinvest in R&D due to the rigorous legal requirements and public scrutiny, especially when compared to their domestic listed counterparts back home.
Moreover, foreign-listed firms may prefer to obtain technologies externally through M&As rather than investing directly in internal innovation projects after the IPOs. This is not only because M&As are considered as a more efficient approach for gaining advanced innovation knowledge (Chesbrough, 2013), but also due to the reason that Chinese companies listing in a foreign market are more capable of identifying and acquiring advanced technologies from developed countries (Fu et al., 2018). Since they are not completely restricted by the Chinese foreign exchange controls5 and are more integrated into the international network, these companies will have more investment opportunities related to R&D (Fu et al., 2018). Hence, Chinese TMT firms listing overseas may focus more on acquiring external knowledge in the international market instead of increasing their R&D expenses directly.
In addition, listing in a developed country is seen as a positive signal for a stronger corporate governance ability and future growth, which can be helpful for gaining a better firm image in the international market (Bancel & Mittoo, 2001; Pagano et al., 2002; Peng & Su, 2014).
Besides the potential benefits of attracting more competent employees than their domestic-listed counterparts (Certo, 2003; Turban & Cable, 2003), this intangible advantage in terms of international reputation may also reduce their overall S&M spending levels after the IPO. Thus:
Hypothesis 2a. After launching IPOs, Chinese TMT firms that are listed on a foreign stock
exchange will deploy less resources in R&D than their domestic-listed counterparts.
Hypothesis 2b. After launching IPOs, Chinese TMT firms that are listed on a foreign stock
exchange will deploy less resources in S&M than their domestic-listed counterparts.
2.3. The effectiveness of different deployment strategies
Apart from solely focusing on the amount of funds that the companies will invest after listings, more attention should be given to the effectiveness of their deployment strategy (Ettlie, 1998). A number of studies show that there is a positive relation between R&D expenditures and the firm’s performance. By examining the US pharmaceutical companies, Roberts (1999) finds that the propensity to innovate will affect the firm’s return on assets in the long term. Similarly, Warusawitharana (2015) also reveals that continuously investing in new research projects and introducing new innovative products can help firms to achieve sustainable high firm performance.
the effectiveness of corporate R&D investment. First, the poor record of intellectual property protection in China can cause spill-over effect among local firms and diminish the uniqueness of the innovation, which further reduce the potential returns for the companies that originally invented the technology (Fang et al., 2017). Although some Chinese TMT companies chose to list on foreign stock exchanges, it is known that most of their R&D centres and headquarters are still located in mainland China due to cost considerations. Currently, they need to face the same issue as others.
Secondly, Chinese firms, in general, lack highly skilled researchers to transform knowledge into real products (Abrami et al, 2014). Obtaining existing technologies through M&As, for example, can grant certain advantages to Chinese firms. However, maintaining and applying the external technology to produce a product that meets the current market needs requires long-term involvement of top technical personnel (Chesbrough, 2003; Enkel et, at., 2009). Especially when considering the short life cycle of innovation, the lack of key technical personnel may lead to newly acquired technologies to become obsolete before development is completed (Lantz & Sahut,2005). Thus, taken these two arguments together, increasing R&D input is less likely to improve the firm value of both domestic-listed and foreign-listed Chinese TMT firms.
they find that promotion and advertisement for old products do not improve firm value in the long term, however, marketing expenses regarding new product introduction do. Due to the temporary benefits of promotions and advertising, firm managers need to repeat such strategies to have a long-term effect on their sales of previous products, which will constantly sacrifice the firm’s overall financial performance (Srinivasan et al., 2003). Investors, thus, tend to punish this type of unsustainable activities and reward the spending related to launching a new product which can bring additional returns and show the firm’s competitiveness (Pauwels et al., 2004).
Hypotheses 3a. A higher level of R&D investments of Chinese TMT firms cannot improve
their firm value.
Hypotheses 3b. A higher level of S&M investments of Chinese TMT firms cannot improve
their firm value.
3. Empirical methodology
3.1. Regression Specification
To identify the overall differences in R&D and S&M resource deployment of Chinese TMT firms, the following regressions are applied for the first hypothesis:
Log R&D intensityi,t = β1 Post-IPOi,t + θ1 Xi,t + ϕt + z1 + εi,t (1)
Log S&M intensityi,t = β2 Post-IPOi,t + θ2 Xi,t + ϕt + z2 + εi,t (2)
where Log R&D intensityi,t and S&M intensityi,t are the natural logarithm of the corresponding
expenditures as the percentage of revenue for firm i in year t; Post-IPOi,t dummy includes 3
years, starting from the IPO year until the second year when the value equals 1; Xi,t includes
a set of time-varying and firm-level controls that are discussed below in this section; ϕt is for
controlling the year fixed effect, capturing the influence of time-series trends that might affect the firms’ deployment strategies regarding R&D and S&M activities; z is the constant term; and εi,t is the error term. More detailed definitions are presented in Appendix 1.
differences in the scale of R&D and S&M deployment after receiving the newly raised funds. Furthermore, I performed an additional test by replacing the Post-IPOi,t dummy with more
specific year indicators such as the years before the IPO. The purpose of this test is to alleviate the concerns that any pre-existing trend could impact the main result.
To further examine the impact of overseas IPOs on the firms’ resource allocation strategies, two groups of observations and an interaction term are implemented in the regression:
Log R&D intensityi,t = β3 Post-IPOi,t + α1 F-listedi,t + γ1 Post-IPO i,t × F-listedi,t + θ3 Xi,t
+ ϕt + z3 + εi,t (3)
Log S&M intensityi,t = β4 Post-IPOi,t + α2 F-listedi,t + γ2 Post-IPOi,t × F-listedi,t + θ4 Xi,t
+ ϕt + z4 + εi,t (4)
where F-listedi,t is a dummy variable that takes a value of 1 if the observation is a foreign
listed TMT firm whose headquarter is based in Mainland China, otherwise is a Chinese TMT firm listing in the domestic capital market; and Post-IPO i,t × F-listedi,t is the newly added interaction term that focuses on the comparison between foreign-listed and domestic-listed firms after completing their IPOs. As discussed in the hypothesis part, the coefficient γ1 and γ2 are expected to be negative, due to the influence of the stringent shareholder protection laws
in developed economies and the brand image enhancement effect of overseas listing.
Tobin's qi,t = η1 Log R&D intensityi,t-1 + α3 F-listedi,t-1 + !1 Log R&D intensityi,t-1 ×F-listedi,t-1 + θ5 Xi,t-1 + ϕt + z5+ εi,t (5)
Tobin's qi,t = η2 Log S&M intensityi,t-1 + α4 F-listedi, t-1 + !2 Log R&D intensityi,t-1 ×F-listedi,t-1
+ θ6 Xi,t-1 +ϕt + z6+ εi,t (6)
where all the explanatory variables are lagged by 1 year; Tobin's qi,t is the proxy for measuring
the firms’ value6 in year t; Log R&D intensity
i,t-1 and Log S&M intensityi,t-1 are respectively
the R&D and S&M expenditures as a percentage of revenue for firm i in year t-1; the interaction term compares the impact of R&D and S&M intensities on firm value between foreign-listed and domestic-listed groups; and the control variables are consistent with those in the previous regressions but the values are in year t-1. Besides, this test only focuses on the two years after the IPO due to data availability issue of Tobin’s q.
In the above regressions, several control variables are included to alleviate endogeneity concerns. First, all the tests consider the science-related background of decision makers such as CEOs and Board chairmen,7 since the past academic and professional experience of the top management team can shape the R&D investment strategies (Barker and Mueller, 2002; Kor and Mahoney, 2005). Specifically, CEOs, with advanced science-related degrees such as a
6 Taking into account the huge differences in net income caused by different accounting standards adopted by foreign listed companies and domestic listed companies (Mirza & Nandakumar, 2012), ROE and ROA are not appropriate to be applied in this study. Tobin's q is considered to be a relatively more suitable indicator of corporate value.
master’s degree in the science field or an engineering qualification, show a strong tendency in increasing their companies’ R&D spending (Barker and Mueller, 2002; Datta and Guthrie, 1994). Since R&D and S&M activities are inseparable for business development (Li & Calantone, 1998; Samiee & Walters, 2003; Chesbrough, 2003), I would expect the coefficients of science-related variable are significant and positive in the first four regressions. Put differently, if the decision maker has the technological educational background, he or she may put more focus on both R&D and S&M areas since S&M is vital for the success of future innovations.
I also included a state-owned dummy variable since the national innovation encouragement policies may have a stronger and more direct impact on firms controlled by the state. Besides, Chinese TMT companies that went public the second time and are listed in multiple stock exchanges may invest their funds differently due to their unique needs and prior experience. Thus, each regression adds the cross-listing dummy which represents the firms who have completed an IPO in the past if the value equals 1. Additionally, the firms’ total assets are also controlled in all the tests. The definitions and the data sources of each variable mentioned above are presented in Appendix 1.
3.2. Data and summary statistics
According to data provided by SINA Finance and Shenzhen Stock Exchange, from 1998 to 2018, 100 and 152 Chinese TMT companies conducted initial public offerings on an overseas and domestic stock exchange respectively. After dropping firms that lack key financial figures, the ultimate dataset for this paper consists of 167 Chinese TMT firms that went public between 2000 and 2018. Specifically, the domestic-listed group has 104 firms. The overseas-listed group, on the other hand, incorporates 63 firms which also includes 12 delisted companies to reduce survivorship bias8. Among 63 foreign-listed companies, 28 Chinese TMT companies are listed on the New York Stock Exchange, 25 are listed on the Nasdaq, and 10 are listed on the Hong Kong Stock Exchange.
The firm-level data covers the IPO year and the two years before and after the IPO. For the 14 firms that went public in 2018, their post-IPO data are collected until the third quarter of 2020 due to data unavailability. Therefore, the period of the underlying data contains from 1998 to 2020 Sep 30 and is restricted to a [-2, +2] year window around the IPO year. For R&D and S&M intensities9, the figures are obtained and rechecked manually from the companies’ filed annual reports since the accessible databases do not provide detailed financial figures. For the same reason, Tobin’s q is calculated based on a widely recognized formula proposed by Chung & Pruitt (1994):
Tobin’s q = (share price × outstanding common shares + liquidating value of the preferred shares + book value of debts) / book value of total assets
The data for each component is collected frim Thomson Reuters Datastream. Besides, the science degree of CEOs and BOD chairmen are collected from the annual reports, their professional social media such as Linkedin and SINA Finance. The rest of the variables are gathered from Datastream. Finally, all time variant variables are winsorized at 1% and 99% levels, and the correlation matrix among all the variables is presented in Appendix 2.
Panel A of Table 1 reports the descriptive statistics of the key variables used in this study. Panel B reports the results of the test of differences in means and medians between the two groups. Foreign listed firms have higher R&D and S&M spending ratios than their domestic listed counterparts, which is in line with the difference showed in Figure 1. Furthermore, Chinese firms that are listed overseas attract more institutional investors such as pension funds. These two groups have similar levels of total assets and tobin’s q in terms of their mean values. Panel C compares the Log R&D intensity and Log S&M intensity before and after the IPO.
Table 1. Summary statistics
Panel A. Descriptive statistics
Variables Foreign-listed Firms Domestic-listed Firms
Obs Mean Median S.D Min Max Obs Mean Median S.D Min Max Log R&D intensity 315 0.1454 0.0984 0.1435 0.0072 0.6781 520 0.0863 0.0702 0.0665 0.0035 0.6781
Log S&M intensity 315 0.2419 0.1631 0.2217 0.0106 0.9387 520 0.0879 0.0705 0.0703 0.0073 0.4184
Pension fund ownership 315 0.0101 0.0000 0.0227 0.0000 0.1200 520 0.0004 0.0000 0.0030 0.0000 0.0336
Log total assets 315 13.2468 12.9288 2.0505 9.7488 18.8059 520 13.3890 13.3857 1.0367 10.5134 17.3756
Tobin's q 126 0.9622 0.2282 1.3920 0.0027 4.6052 208 0.9388 0.4515 1.1231 0.0028 4.6052
The table presents the descriptive information of the Chinese TMT firms in the dataset. The dataset includes 63 foreign-listed firms and 104 domestic-listed firms, covering the IPO year and 2 years before and after the IPO. The missing values are replaced by the previous or the following year values. Therefore, there are 315 (=63*5) observations in the foreign-listed group and 520 (=104*5) observations in the domestic-listed group. Log R&D and S&M intensities are the natural logarithm of the sum of 1 and the actual expenditures as a percentage of revenue in the same year (e.g. Log (1+R&D/Revenue)). The unit of total assets is US dollars in millions. Pension fund ownership is the share percentages acquired by pension funds. Tobin’s q is calculated based on the formula proposed by Chung & Pruitt (1994), where the sum of equity market value, liquidating value of the preferred shares and book value of debts divided by the book value of total assets. Besides, the observation number of Tobin’s q only accounts for 2/5 of those of other variables since the data is only available for the two years after the IPO. All the variables in this table are winsorized at 1% and 99% levels.
Panel B. Test of differences in means and medians
Variables
Mean Median
Foreign-listed Domestic-listed Diff Foreign-listed Domestic-listed Diff
(1) (2) (1)-(2) (3) (4) (3)-(4)
Log R&D intensity 0.1454 0.0863 0.0591*** 0.0984 0.0702 0.0282*** Log S&M intensity 0.2419 0.0879 0.1541*** 0.1631 0.0705 0.0926*** Pension fund ownership 0.0101 0.0004 0.0096*** 0.0000 0.0000 0.0000*** Log total assets 13.2468 13.3890 -0.1422*** 12.9288 13.3857 -0.4569*** Tobin's q 0.9622 0.9388 0.0234*** 0.2282 0.4515 -0.2234***
Panel C. R&D and S&M intensities before and after the IPO
Pre-IPO period (t-2 ~ t-1) Post-IPO period (IPO year t ~ t+2)
Obs Mean Median S. D. Min Max Obs Mean Median S. D. Min Max
Domestic-listed
Log R&D intensity 208 0.0757 0.0637 0.0636 0.0035 0.6781 312 0.0933 0.0744 0.0676 0.0035 0.4868 Log S&M intensity 208 0.0816 0.0707 0.0628 0.0073 0.3361 312 0.0921 0.0702 0.0747 0.0073 0.4184
Foreign-listed
Log R&D intensity 126 0.1602 0.1027 0.1625 0.0089 0.6781 189 0.1355 0.0964 0.1287 0.0072 0.6781 Log S&M intensity 126 0.2622 0.1629 0.2451 0.0177 0.9387 189 0.2284 0.1633 0.2042 0.0106 0.9387
Overall
Figure 1. R&D and S&M intensity levels between foreign listed and domestic listed firms
This graph compares the average R&D and S&M intensity levels of foreign-listed firms and domestic-listed firms two years before and after the IPO date, by using the raw data without controlling for other relevant factors. The dark lines display the trend of R&D expediture as a percentage of sales durign these 5 years period, while the light blue lines shows the changes in S&M spending ratios. The dot lines and the solid lines represent the foreign-listed and the domestic-listes groups respectively.
4. Empirical analysis
Table 2 analyses the R&D and S&M intensity levels around the time of IPO. The dependent variable in column (1) to (3) is the are the natural logarithm of the sum of 1 and the actual expenditures as a percentage of revenue in the same year, while in column (3) to (6) is the natural logarithm of the sum of 1 and S&M intensity. The coefficients on the IPO time dummies are the main focus. In panel A, the post-IPO dummy starts from the IPO year until the second year after the IPO if the value equals 1. After including the control variables and the year fixed effect, the coefficients of the post-IPO dummy in column (3) and (6) are statistically significant. This indicates that Chinese TMT firms have a higher level of spending on both R&D and S&M activities after their IPOs, holding all other variables constant. The difference between the figure 0.0223 in column (3) and 0.0309 in column (6) shows that
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% t-2 t-1 IPO t+1 t+2
Domestic listed - S&M% Foreign listed - S&M%
Chinese TMT companies, in general, invest virtually the same in R&D as in S&M after completing the listing. Specifically, the R&D intensity increased by around 20.958 percentage points (= (e0.0223-1)/ 0.1076 in Table 1 Panel C) compared to the pre-IPO period in term of change rates, and S&M intensity increased by around 20.964 percentage points (= (e0.0309 -1)/ 0.1497 in Table 1 Panel C).
When turning to the difference between the foreign-listed and domestic-listed groups in terms of their spending levels on R&D and S&M, the findings are in line with Figure 1. In column (3) and (6) of Table 1 Panel A, the significant and positive coefficients of foreign-listed dummy suggest that Chinese TMT firms listing overseas spend more capital in average on both R&D and S&M when compared to their domestic listed counterparts. The high level of Selling and Marketing expenses for foreign-listed companies may be driven by the need of enhancing brand image to increase firm valuation for their overseas IPOs and attract more investors.
strategy and its effectiveness can be seen as a reflection of the values and cognitive foundations of the senior management in the organization (Hambrick & Mason, 1982). Similarly, when studying the impact on S&M intensities in column (6) after controlling for other factors, the coefficient of science-related experience is also positive and significant. As argued in section 3.1, decision-makers who have sufficient knowledge in science and technologies are more likely to understand the importance of marketing due to the close relation between R&D and S&M activities, thus selling and marketing campaigns are one of their main focuses as well.
Pension fund ownership has a negative and significant correlation with the firm’s R&D and S&M spending, however, the effect on S&M is much higher. Since pension funds prefer their investees to have stable growth rather than applying aggressive business strategies for short-term gains, they may put pressure to ensure that their invested firms reduce arbitrary spending and manage their fund in a more efficient way (Davis & Thompson, 1994; Hoskisson et al., 2002). Besides, Chinese firms controlled by the state show more emphasises in both S&M and R&D areas as compared to private-owned firms, which is consistent with the national innovation policies.
spending. Furthermore, total assets show a negative relationship with the R&D and S&M spending, which is in line with prior studies (Hansen, 1992; Huergo & Jaumandreu, 2004).
To address the concerns that the main results are driven by pre-existing trends, I performed a dynamic effect test by replacing the post-IPO dummy in Table 1 Panel A with more specific time frames such as the pre-IPO years. If the spending increase in the post-IPO period is not induced by the parallel trends, an opposing trend during the pre-IPO years should be observed. The test results are shown in Panel B of Table 1. Pre-IPO Year 1 and Pre-IPO Year 2 present both individual years separately prior to the IPO, while Pre-IPO Year 1&2 considers two years together if the value is 1. The same principle applies to post-IPO dummy variables.
Table 2. R&D and S&M Deployment Strategies after IPOs
Panel A. R&D and S&M Intensities after the IPOs
(1) (2) (3) (4) (5) (6)
VARIABLES Log RD Log RD Log RD Log SM Log SM Log SM
Post-IPO Dummy 0.0017 0.0101 0.0223*** -0.0062 0.0325*** 0.0309*** (0.0078) (0.0080) (0.0082) (0.0120) (0.0102) (0.0108) Foreign-listed Dummy 0.0607*** 0.0566*** 0.1614*** 0.1386***
(0.0090) (0.0092) (0.0128) (0.0134) Science Degree Dummy 0.0215*** 0.0218*** 0.0296*** 0.0219**
(0.0072) (0.0067) (0.0102) (0.0094) Pension Fund Ownership -0.4609* -0.5992*** -0.9221*** -0.8225**
(0.2354) (0.2168) (0.3312) (0.3203) State-owned (>50%) Dummy 0.0665*** 0.0870*** 0.0365*** 0.0211* (0.0188) (0.0242) (0.0102) (0.0123) Cross-listing Dummy 0.1091*** 0.1282*** 0.0105 0.0440 (0.0190) (0.0192) (0.0276) (0.0332)
Log Total Assets -0.0063* -0.0055 -0.0259*** -0.0318***
(0.0034) (0.0034) (0.0046) (0.0053) Constant 0.1076*** 0.1529*** 0.2741*** 0.1497*** 0.4003*** 0.5356***
(0.0065) (0.0423) (0.0542) (0.0099) (0.0595) (0.1290)
Year Fixed Effect NO NO YES NO NO YES
Observations 835 835 835 835 835 835
Adjusted R-squared -0.0011 0.0999 0.2132 -0.0009 0.2669 0.3446
Panel B. Dynamic Effect Analysis
(1) (2) (3) (4) (5) (6)
VARIABLES Log RD Log RD Log RD Log SM Log SM Log SM
Pre-IPO Year 2 (t-2) 0.0018 -0.0170
(0.0124) (0.0174)
Pre-IPO Year 1 (t-1) -0.0117 -0.0135 -0.0308** -0.0138
(0.0084) (0.0125) (0.0150) (0.0173)
Pre-IPO Year 1&2 -0.0055 -0.0245*
(0.0084) (0.0136) IPO Year (t) -0.0018 0.0170 (0.0124) (0.0174) Post-IPO Year 1 (t+1) 0.0250*** 0.0103 (0.0090) (0.0141) Post-IPO Year 2 (t+2) 0.0325*** 0.0114 (0.0099) (0.0149)
Post-IPO Year 1&2 0.0285*** 0.0266** 0.0109 0.0278*
(0.0078) (0.0131) (0.0126) (0.0158) Foreign-listed Dummy 0.0581*** 0.0577*** 0.0578*** 0.1392*** 0.1391*** 0.1391***
(0.0093) (0.0092) (0.0092) (0.0134) (0.0134) (0.0134) Science Degree Dummy 0.0224*** 0.0224*** 0.0222*** 0.0220** 0.0221** 0.0219** (0.0067) (0.0067) (0.0067) (0.0093) (0.0093) (0.0093) Pension Fund Ownership -0.5899*** -0.5873*** -0.5910*** -0.8216** -0.8180** -0.8218**
(0.2199) (0.2198) (0.2194) (0.3204) (0.3202) (0.3202) State-owned (>50%) Dummy 0.0889*** 0.0890*** 0.0888*** 0.0217* 0.0219* 0.0217* (0.0227) (0.0223) (0.0225) (0.0123) (0.0118) (0.0122) Cross-listing Dummy 0.1275*** 0.1283*** 0.1276*** 0.0432 0.0440 0.0433
(0.0199) (0.0198) (0.0198) (0.0332) (0.0333) (0.0332) Log Total Assets -0.0059* -0.0061* -0.0059* -0.0318*** -0.0321*** -0.0318***
(0.0034) (0.0034) (0.0034) (0.0053) (0.0053) (0.0053) Constant 0.2758*** 0.2861*** 0.2773*** 0.5518*** 0.5626*** 0.5348***
(0.0567) (0.0554) (0.0543) (0.1316) (0.1309) (0.1293)
Year Fixed Effect YES YES YES YES YES YES
Observations 835 835 835 835 835 835
Adjusted R-squared 0.2208 0.2208 0.2213 0.3433 0.3443 0.3441
Table 3 column (1) to (3) examine the impact of overseas listing on R&D intensities, while column (4) to (6) study the impact on S&M intensities. The main focus is the interaction term
Post-IPO × Foreign-listed which compares the deployment strategies of foreign-listed with
those of domestic-listed firms after their listings. Column (3) includes all the control variables and the year fixed effect. As the table shows, the coefficient of Post-IPO × Foreign-listed in column (3) is statistically negative, indicating that, after the IPO, the increase in R&D intensity of foreign listing firms is about 3.09 percentage points (= e-0.0314-1) lower than that of the domestic-listed group. Put differently, compared to pre-IPO periods, domestic-listed firms increased their R&D spending as the percentage of revenue by around 3.38 percentage points (= e0.0332 - 1), while foreign-listed firms increased their R&D intensity by only 0.28 percentage points (= 3.38% - 3.09%). In terms of change rates, the R&D intensity of foreign-listed firms increased by about 1.75 percentage points (= 0.28%/ 0.1602 in Table 1 Panel C) after IPO, and that of domestic-listed firms increased by around 44.66 percentage points (=3.38%/0.0757 in Table 1 Panel C).
protections, can prevent Chinese firms listing in those countries from overinvesting. The management teams, for example, have to disclose more value-relevant information to the public according to the local regulation, which can alleviate the agency issue caused by information asymmetry and induce them to make cautious investment decisions (Shleifer and Wolfenzon, 2002; Xiao, 2013). Besides, by studying a sample of 1,600 non-financial listed firms in China between 2006 and 2015, Han et al., (2019) point out that governmental subsidies such as tax incentives for R&D projects can significantly increase the chance of firm overinvestment. Thus, domestic-listed firms, operating under a relatively weak legal environment and enjoying high degree of public subsidies, are likely to overspend in R&D after their IPOs.
The third explanation is based on the findings of Deng (2009) and Li et al. (2016) discussed in the hypothesis section. They find that the current prevalent practice for Chinese companies to improve their innovation capabilities is through Merge and Acquisition, particularly in developed countries where most of the advanced technologies concentrate. Besides, foreign listed firms have more access to R&D investment opportunities as they are more embedded in the global market and have sufficient foreign currencies without the constraint of the Chinese foreign exchange control (Fu et al., 2018). Therefore, it is possible that the low increase in R&D intensity of foreign-listed firms cannot present the whole picture.
total value of the deals for each following year is greater as showed in Panel B. This implies that the average unit deal value of the M&As conducted by foreign-listed firms is much higher than those of domestic-listed firms, which can further indicate that firms listing overseas may prefer quality-oriented investments. Since a deal value is an indicator of the current status and the potential growth of a target firm (Martin & Shalev, 2017), the high bidding price afforded by the foreign-listed firms can show that their investment strategy is to acquire relatively matured technologies with specific needs rather than expanding aggressively and arbitrarily. Their preference for quality than quantity may also be driven by the impact of the stringent shareholder protection law in the listing countries.
In addition, as Table 4 and the dark dotted bars in panel A of Figure 2 show, Chinese firms listing in a foreign market enjoy richer opportunities of overseas investment. In Table 4, during the post-IPO period, the Chinese foreign-listed firms acquired 27 companies overseas, whose headquarters are located in 13 regions, many in Cayman Island and the US. The domestic-listed group, on the other hand, completed 20 overseas M&As after the IPO. Their targets, however, are only distributed in 7 regions and mainly concentrated in Hong Kong. Thus, foreign listed firms are more likely to take advantage of their international position to acquire external knowledge via M&As after launching their IPOs.
levels during the pre-IPO period in Table 1 Panel C, the similar increase in S&M intensity levels after the IPO implies between these two groups, in fact, implies that domestic-listed firms spent much higher in S&M in terms of the change rates. This difference may also be due to the shareholder protection laws argued above and the positive signalling effect of overseas listing. Besides, the correlations between the control variables and the dependent variables in Table 3 are generally consistent with the results in Table 2.
Table 3. The impact of overseas listing
(1) (2) (3) (4) (5) (6)
VARIABLES Log RD Log RD Log RD Log SM Log SM Log SM
Post-IPO Dummy 0.0177*** 0.0256*** 0.0332*** 0.0105* 0.0415*** 0.0361*** (0.0058) (0.0070) (0.0078) (0.0061) (0.0083) (0.0097) Foreign-listed Dummy 0.0845*** 0.0848*** 0.0742*** 0.1806*** 0.1755*** 0.1470*** (0.0151) (0.0149) (0.0153) (0.0222) (0.0206) (0.0229) Post-IPO × Foreign-listed -0.0424** -0.0440** -0.0314* -0.0442 -0.0257 -0.0149 (0.0182) (0.0187) (0.0188) (0.0271) (0.0273) (0.0285) Science Degree Dummy 0.0214*** 0.0218*** 0.0295*** 0.0219** (0.0071) (0.0067) (0.0102) (0.0094) Pension Fund Ownership -0.2541 -0.4560* -0.8014** -0.7546**
(0.2397) (0.2349) (0.3504) (0.3488) State-owned (>50%) Dummy 0.0666*** 0.0874*** 0.0365*** 0.0213* (0.0172) (0.0221) (0.0110) (0.0122)
Cross-listing Dummy 0.1166*** 0.1339*** 0.0149 0.0466
(0.0183) (0.0189) (0.0280) (0.0340) Log Total Assets -0.0066** -0.0056* -0.0261*** -0.0319***
(0.0033) (0.0034) (0.0046) (0.0054) Constant 0.0757*** 0.1479*** 0.2576*** 0.0816*** 0.3975*** 0.5278***
(0.0044) (0.0416) (0.0540) (0.0044) (0.0586) (0.1288)
Year Fixed Effect NO NO YES NO NO YES
Observations 835 835 835 835 835 835
Figure 2 - M&A activities around the IPO date
Panel A. M&A frequency
Panel B. M&A deal value (in $)
The two bar graphs present the M&A activities of domestic-listed and foreign-listed firms 5 years before and after the IPO event. Panel A shows the numbers of completed M&A in each year while Panel B compares the total dollar value of M&A deals for each group during the period. To have a more detailed analysis, M&As are classified as overseas and domestic deals according to the headquarter locations of the targets. The underlying data is collected from Zephyr M&A database by using the ISIN number of the whole set of the samples in this paper. Before the IPO (t-5 ~ t-1), the foreign-listed group completed 7 M&As which includes 2 overseas and 5 domestic deals. The total deal amount is about 2.4 million dollars. During the same period, the domestic-listed group acquired 41 Chinese companies and 2 foreign companies which cost about 1.5 million dollars in total. After the IPO (t ~ t+5), the foreign-listed group acquired 44 Chinese firms and 27 foreign firms, amounting to 30 million dollars. The domestic-listed group completed 179 domestic M&As and 20 overseas deals which cost in total 12.8 million dollars. 0 10 20 30 40 50 60 70 t-5 t-4 t-3 t-2 t-1 IPO t t+1 t+2 t+3 t+4 t+5
F-listed - domestic M&A F-listed - overseas M&A
D-listed - domestic M&A D-listed - overseas M&A
1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 t-5 t-4 t-3 t-2 t-1 IPO t t+1 t+2 t+3 t+4 t+5
F-listed - domestic M&A F-listed - overseas M&A
Table 4. Overseas M&A - Location Distribution of the Foreign Targets’ Headquarters Targets HQ country Pre-IPO (t-5 ~ t-1) Post-IPO (t ~ t+5) Foreign-listed Dometic-listed Foreign-listed Dometic-listed Cayman Island 2 7 USA 6 Luxembourg 2 Hong Kong 2 12 France 2 3 Netherlands 1 Turkey 1 South Korea 1 Malta 1 Japan 1 India 1 1 Russia 1 Australia 1 Brazil 1 Spain 1 1 UK 1 Canada 1 Singapore 1 Total Deals 2 2 27 20
This table focuses on the overseas M&As that the foreign-listed and domestic-listed firms completed around their IPOs, and summarizes the country distribution of the foreign targets’ headquarters. Pre-IPO includes 5 to 1 years before the IPO, while Post-IPO is from the year of the IPO to the following 5 years. During the pre-IPO period, foreign-listed and domestic-listed firms acquired 2 companies respectively. After completing their listings, they completed 27 and 20 M&A deals respectively. The targets of these overseas M&As are located in 18 regions. Hong Kong is considered as a foreign region as it is operating under the “one country, two systems” principle which provides a more capitalism-driven environment for firms operating there.
Table 5 examines the effectiveness of Chinese TMT firms’ R&D and S&M deployment strategies by employing the one-year lag value of Log R&D, Log S&M and other control variables. This test only focuses on the two years after the IPO due to data unavailability. Column (1) to (4) study the impact of R&D intensity levels on the firm value, and column (3) and (4) add an interaction term Log R&D t-1 × Foreign-listed t-1 to test the impact between foreign-listed and
domestic-listed firms. Before controlling for the year fixed effect, the coefficient -3.3546 on Log
R&D t-1 in column (1) shows that increasing R&D spending can reduce firm value. However,
In column (3) and (4), the coefficients of Log R&D t-1 are both significantly negative, indicating
that R&D expenditure is negatively correlated with the corporate value for domestic-listed firms. Besides, the coefficients on the interaction term Log R&D t-1 × Foreign-listed t-1 imply that there
is no significant difference in the effectiveness of R&D expenditures between foreign-listed and domestic-listed companies. Therefore, in general, allocating more resources in R&D will not have a positive impact on the company's value.
The positive effects of R&D investment may appear in a longer time frame, however, increasing R&D will not be helpful for boosting the company's value in one year especially for Chinese firms. As discussed in the hypothesis section, the technology spill-over effect caused by the poor intellectual property protection regulations in China can diminish the return of innovations (Fang et al., 2017). In addition, whether a company chooses to acquire the latest technology externally or to increase its internal development expenditures to gain a higher competitiveness, highly skilled employees are a key factor in the success of corporate innovation (Chesbrough, 2003; Enkel et, at., 2009). Although both groups increased their spending and completed a number of M&As after their IPOs as showed in Table 2 and Figure 2, the weak ability to attract top engineers and technicians can deter them from generating new innovative ideas and converting the current marketing and technological knowledge to valuable and profitable products (Abrami et al, 2014).
Column (5) to (8) in Table 5 focus on the effectiveness of S&M input on firm value. Similar to the results of R&D, the coefficient on Log S&M t-1 in column (5) implies the negative correlation
suggests that, for domestic-listed firms, increasing S&M intensity can have a negative impact on their firm value. The same can be applied to foreign-listed firms as well, when considering the insignificant coefficient on the interaction term. Overall, high levels of input in S&M activities cannot lead to high firm value for Chinese TMT companies. The negative marketing efficiency can imply that Chinese TMT firms most likely conducted extensive activities such as promotions for old products or market research rather than launching valuable products, since advertising expense regarding the new product introduction is often positively correlated with firm value (Pauwels et al., 2004). This can further indicate the current weak position of Chinese TMT firms in terms of their technological output.
Cross-listing status does not exert any significant influence on the firm value after controlling for the year fixed effect, which is contrary to the findings of other studies (e.g. Sami & Zhou, 2008). This may be due to the fact that technological competitiveness is the investors’ main focus rather than meeting different regulations and disclosing additional information. Although the cross-listing can induce Chinese TMT firms to increase R&D input as showed in Table 2 and 3, there is no promise that the R&D project will succeed and bring adequate returns back to the firm. Lastly, there is no significant relationship between the level of total assets and the firm’s tobin’s q. This may be because, in the TMT sector, investors pay more attention on the innovation ability of the firm rather than the number of assets, especially considering the low level of assets owned by the firms in the innovation-intense industry.
5. Conclusion
Table 5. The Effectiveness of R&D and S&M Deployment Strategies
(1) (2) (3) (4) (5) (6) (7) (8)
VARIABLES Tobin’s q Tobin’s q Tobin’s q Tobin’s q Tobin’s q Tobin’s q Tobin’s q Tobin’s q Log R&D t-1 -3.3546*** -1.1031 -2.8921*** -2.2214** (1.0833) (1.3043) (1.0170) (0.9603) Log S&M t-1 -0.4575 -0.9490 -3.1646*** -2.6009** (1.7270) (1.8212) (0.8908) (1.0687) Foreign-listed Dummyt-1 1.1418** -0.2112 1.2087** -0.4246 0.7089 (0.4873) (0.2526) (0.5877) (0.3872) (0.6760)
Log R&D t-1× Foreign-listed t-1 -0.6648 2.0993 (1.7712) (2.3685)
Log S&M t-1 × Foreign-listed t-1 3.2358 2.1742
(2.2094) (2.6353) Science Degree Dummy t-1 0.6885** 0.0654 0.6914** 0.0528 0.6343* 0.0681 0.6310* 0.0671
(0.3386) (0.2004) (0.3408) (0.1987) (0.3307) (0.2009) (0.3309) (0.2002) Pension Fund Ownership t-1 3.4919 19.9718** 3.5029 20.3131** 3.1470 19.3219** 3.4058 19.8175**
(7.9818) (8.2513) (7.9896) (8.3102) (8.1210) (8.6006) (8.1803) (8.7654) State-owned (>50%) Dummy t-1 -0.7846*** -1.2383*** -0.8264*** -1.1372*** -1.0165*** -1.3236*** -0.8675*** -1.2210***
(0.2379) (0.3008) (0.2433) (0.2890) (0.1966) (0.2574) (0.2030) (0.2554) Cross-listing Dummy t-1 -1.2861* -0.0240 -1.2604* -0.1580 -1.7132** -0.1594 -1.7103** -0.1689
(0.6582) (0.5585) (0.6585) (0.6008) (0.6771) (0.5369) (0.6759) (0.5301) Log Total Assets t-1 0.2183 -0.0752 0.2167 -0.0741 0.2362* -0.0926 0.2456* -0.0830
(0.1361) (0.1841) (0.1373) (0.1844) (0.1418) (0.1816) (0.1437) (0.1826) Constant -2.0958 1.5946 -2.1167 1.2617 -2.5697 1.9886 -2.4554 1.6440
(1.9211) (2.3062) (1.9143) (2.4099) (2.0312) (2.7276) (2.0082) (2.9570)
Year Fixed Effect NO YES NO YES NO YES NO YES
Observations 334 334 334 334 334 334 334 334
Adjusted R-squared 0.0471 0.3662 0.0443 0.3650 0.0344 0.3670 0.0353 0.3666
This table examines the effectiveness of the deployment strategies regarding R&D and S&M expenditures. The dependent variable is the firm value which is measured by Tobin’s q. The main independent variables are the natural logarithms of R&D and S&M intensities, as well as the interaction terms. Column (1) to (4) study the impact of
R&D intensity levels on the firm value, and column (3) and (4) add an interaction term Log R&D t-1 × Foreign-listed t-1 to test the impact between foreign-listed and
strategies, I employed Tobin’s q as a proxy to measure the firm value and test it on the one-year lagged value of R&D and S&M intensities. The results show that increasing R&D and S&M expenditures will not improve Chinese TMT firms’ value, whether domestic or foreign listed. This may be due to the spill over effect caused by the poor intellectual property protection regulations in China and the firms’ weak ability to attract top engineers and technicians. In addition, investors tend to value the company’s technological competitiveness and new product launches more than regular advertising campaigns.
Taken these results together, we can conclude that there is still a long road for Chinese TMT firms to become a leading force for innovation in the world. Although Chinese TMT companies have shown their enthusiasm for innovation and listing overseas can partially facilitate them to make favourable decisions, the development of competitive core technologies cannot solely rely on the amount of spending. Knowing how, where and when to invest are the key to success (Cuervo-Cazurra & Annique Un, 2010). For example, the higher increase in S&M expenditures after the IPO can be a good start, however, the market knowledge will be wasted if there are no competent scientific researchers to study them. The same can be applied to R&D spending as well. Increasing internal R&D expenditures or acquiring the latest technologies via M&As but without the employees to apply them efficiently is, in fact, an overinvesting behaviour, which may backfire on the firms themselves by disappointing investors.
paper may suffer from selection bias considering the manual collection process. Moreover, the endogeneity issue is the main concern of this study, particularly for the significant correlation between R&D and S&M expenses. As R&D and S&M expenses are also significantly correlated with other control variables, it is likely that there are omitted bias in this paper. When testing the first and the second hypotheses, the close relation between these two variables are not considered in the regressions, since the main focus of this paper is to examine the changes of spending after the IPO and adding them may cause other analytical issues. It is also possible that the impact of R&D and S&M on each other will be mitigated during the comparison of βs. To check for the robustness of the initial analysis, I performed an additional test by adding the
log R&D intensity and log S&M intensity in the regression (1) to (4). The results of the
robustness test, which is presented in Appendix 3, show that there is no significant change in the main findings of this paper.
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