The nonlinear relationship between financial constraints and R&D investment: the mediating role of executive stock options

Abstract

PurposeThe current study aims to investigate the mediating role of executive stock options in the nonlinear relationship between financial constraints and research and development (R&D) investment through two measures of financial constraints.Design/methodology/approachThis study is based on a sample of 90 French firms for the period extending from 2008 to 2020. The authors employ a panel threshold method to analyze whether the impact of financial constraints on R&D investment depends on the level of financial constraints or not.FindingsUsing SA index (Hadlock and Pierce, 2010) and FCP index (Schauer et al., 2019) as measures of financial constraints, the authors demonstrate that the relationship between financial constraints and R&D investment is nonlinear. Moreover, the authors find that executive stock options mediate partially the relationship between financial constraints and R&D investment. More specifically, the authors show that stock options could play two roles depending on the level of the financial constraints; inconsistent mediation for firms with low/medium level of financial constraints and partial mediation for highly constrained firms.Originality/valueThis paper is the first to the best of the authors' knowledge to investigate the nonlinear relationship between financial constraints and R&D investment as well as the mediating role of executive stock option using dynamic panel threshold models.