Spillover Effects of Preventive Regulation and Corporate R&D Investment Catering: Evidence from China

ABSTRACT

This paper explores the spillover effect of proactive preventive regulation represented by R&D expense inquiry letters (hereafter, RDILs) and its impact mechanism. Using deterrence theory and Chinese A-share listed firms from 2015–2020, we find that the industry receiving RDILs has a regulation effect on the R&D investment intensity catering motive of the non-receiving firms in the industry. That is, there is an industry spillover effect of RDILs regulation. The results of the regulatory mechanism analysis show that the industry spillover effect of RDILs regulation is more pronounced for non-receiving firms with more severe R&D manipulation intensity or weaker product market competitive positions. Further analysis shows that the inclusion of peer comparison questions in the RDILs increases the industry spillover effect of the inquiry letter regulation. We also find that the industry spillover effects of RDILs regulation result in higher future innovation quality for non-receiving firms. Overall, our study enriches our understanding of the effectiveness of inquiry letter regulation and provides some guidance for regulators’ regulatory practice.

KEYWORDS:

• R&D expense inquiry letter (RDIL)
• R&D investment intensity
• deterrence theory
• R&D manipulation
• product market competition

JEL:

• G31
• G34
• G38

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2023.2218969

Notes

1. In our paper, we classify the industries to which firms belong in the following way: According to the China Securities Regulatory Commission’s industry classification criteria, we classify firms based on their two-digit classifications if they are in non-manufacturing industries and based on their third-digit classifications if they are in manufacturing industries.

2. A discussion of the rationality of the variable design of rds_{i,t +1} can be found in the Appendix B1.

3. When δ₁ is positive, it indicates that there is a correlation between the receipt of RDILs in the industry and the decrease in the motive of R&D investment intensity catering of non-receiving firms.

4. A discussion of Mrd_it can be found in the Appendix B2.

5. Chinese invention patents are similar to utility patents in the United States, which have the highest demand for technology and talents, the highest technological content, and the strongest originality.

Additional information

Funding

Yan Yu gratefully acknowledges the financial support from the National Natural Science Foundation of China [#72172008].