R&D investments: The effects of different financial environments on firm profitability

This study investigates the effects of a country's financial system on current R&D investments and the future profitability of the firm. My paper explores the association between R&D investments and the firms’ future profitability in different financial environments. Empirical results from 10 countries reveal that as the proportion of a country's bank-based financing relative to market-based financing increases, the relationship between the R&D investments and the level of future firm profitability increases. Moreover, I find that the effects of R&D investments on the uncertainty of future firm profitability are similar in both market-based and bank-based financial environments.