R&D spending intensity of private vs public firms: the role of cash flow, leverage and information quality

Abstract

Purpose

This study provides a large sample comparison of research and development (R&D) spending intensity in private and public firms and the extent to which these firms' unique characteristics affect their R&D spending rate.

Design/methodology/approach

The study compares both private and public data from UK firms for the period 2006–2016, generating a total matched 232,029 firm-year observations, and applies a probability model technique to our large panel datasets.

Findings

The authors uncover that private firms show lower R&D spending intensity compared to their public counterparts. The authors evidence also shows that privately owned firms in the technological (non-technological) sector display higher (lower) probability of R&D spending intensity. Compared with public firms, the authors further observe that the intensity of private firms' R&D spending increases with higher internal cash flow, leverage and industry information quality. The authors results remain robust to alternative econometric models.

Research limitations/implications

Despite the findings of this study, the authors would like to point out that the use of a single country's data limits the generalisability of our findings. Thus, future studies may also consider extending this study across multiple countries.

Practical implications

A key implication of our study is that private firms are more likely to finance R&D intensity from the internally generated cash flow compared to the public ones. This stems from the fact that private firms are more likely to experience higher costs in raising external finance for innovative activities than public firms. Thus, easy access to funding for private firms is vital for enhancing R&D activities of the private firms.

Originality/value

By combining both private and public firms' datasets, the authors are able to provide new evidence to suggest that the intensity of private firms' R&D spending is dependent on internal cash flow, leverage and the industry information level. In fact, to the best of the authors’ knowledge, this is the first study that explores these relationships.

Citation

Adu-Ameyaw, E., Danso, A., Hickson, L. and Lartey, T. (2022), "R&D spending intensity of private vs public firms: the role of cash flow, leverage and information quality", Journal of Applied Accounting Research, Vol. 23 No. 4, pp. 770-787. https://doi.org/10.1108/JAAR-07-2021-0179