The impact of capital operation strategy and financing constraints on firm innovation

Abstract

This study investigates the effects of capital operation strategy on firm innovation and the processes by which these effects are influenced, using Chinese listed companies as an example from 2007 to 2021. This article specifically examines the effects of the period expense ratio, free cash flow level, accounts receivable turnover rate, and firm innovation. It also examines the channel through which capital operation strategy influences firm innovation. The main indicators of capital operation strategy in this paper include period expense ratio, free cash flow level, and turnover rate of accounts receivable. R&D costs serve as a gauge of firm innovation. Panel data, the panel fixed effect model, and the mediating effect model are used for empirical research. The results of panel fixed regressions show that period expense ratio and free cash flow level significantly positively affect firm innovation below the 5% significance level. However, the turnover rate of accounts receivable doesn’t significantly affect firm innovation. Further research on mediating effect regression shows that financing constraints are one of the important influencing mechanisms, playing a partial mediating role. The results demonstrate that firms can boost their investment in innovation by lowering their free cash flow and period expense ratio. By imposing financial restrictions, they can also raise the amount of money invested in innovation.