Does the liquidity effect between parent company and subsidiaries increase R&D investment?: Base on the corporate diversification strategy

Compared to traditional group that operating by subordinate segments, importing equity investment in subsidiaries by parent draws several special characters on the firm financial liquidity. Does the scale of parent equity investment in subsidiaries enhance the overall liquidity? Moreover, if this effect really exists, what association to the firm's R&D investment? In this paper, we used the year of 2008-2010 panel data of listed companies in China and cross-section data, to investigate the relationship between the scale of parent's equity investment under diversification strategy and corporate cash holding, and the cash sensitivity to R&D, we find that under the parent diversification behavior dominated by equity investment in subsidiaries, the internal capital market exists and the complementary cash flow can generate the liquidity effect, relieving financing constraint, but did not significantly reduce the sensitivity of R&D investment to cash flow. In addition, better corporate governance led to reduce the R&D scale, financing constraints and R&D expenditures negatively correlated.