Cash Flow, R&D Investment and Profitability : Evidence from Chinese High-Tech and Other Industrial Firms

This paper examines the dynamic relationship among cash flow, R&D investment and profitability. Previous empirical studies have not considered the dynamics of this relationship, the endogeneity problem and causality factors. To overcome these econometric problems simultaneously, I build a panel vector autoregression model (PVAR) for a sample of 588 China's listed firms over eight years. There is some evidence of reverse causality between these variables after controlling the individual fixed effects. We find that the positive impact of R&D investment on profitability over the long term, which indicates the difference in R&D effect on profitability for the two groups of firms, is significantly larger in high-tech firms. In contrast, the positive impact of energy intensity on carbon intensity is mainly reflected in the short term. This paper confirms the importance of R&D investment and financing constraint in improving firm profitability