**2. Theoretical Background**

Previous studies indicate that a firm's sustainable competitiveness mainly derives from unique and inimitable intangible assets, such as intellectual property or patent rights, which are mostly developed through substantial R&D investments [14]. However, R&D investments are characterized by high risk and a grea<sup>t</sup> amount of sunk cost, which hamper its external financing [15]. A review of the literature shows an ambiguous influence of firm financial leverage on R&D investments. First, the perspective of agency cost [16,17] argues a negative impact of financial leverage on R&D investments. The agency theory considers that the result of R&D investments leads to conflicts of interests between debt holders and shareholders. This is because, although taking the risk of R&D projects allows shareholders to gain higher risk premiums, debt holders cannot similarly share in the risk premium reward that flows from successful R&D projects as do shareholders but only gain a fixed amount of interest. However, both debt holders and shareholders suffer bankruptcy costs from unsuccessful R&D projects. The unbalanced risk–reward relationship thus makes debt holders unwilling to fund significant R&D expenditures.

Second, the information asymmetry problem further causes debt holders to reduce investments in R&D projects when managers keep information confidential for competitive reasons. Under such circumstances, debt holders have trouble with forecasting the consequences of R&D projects. Considering the unbalanced risk–reward relationship characterizing debt financing, the concern of informational asymmetry increases the difficulty that managers use debt financing for R&D projects than for other less risky capital projects [3,18,19].

Finally, from the perspective of transaction costs, the financing decision of firms counts principally on the attributes of asset properties. In particular, the level of intangibility and uniqueness of business have a negative impact on using debt financing [20]. According to transaction cost theory, intangible assets are difficult to write explicit contracts to protect and thus their transactions suffer from the grea<sup>t</sup> hazard of opportunism [21,22]. Meanwhile, unique firm assets are not suggested as collaterals for loans because their values are costly if deployed for other uses and could be carelessly distributed by outsiders [23]. Since R&D investments tend to create intangible and unique firm assets, R&D investments should have less debt financing to avoid their value being appropriated by other firms [20,23].

Against this view, there is an alternative perspective suggesting a positive relationship between financial leverage and R&D investment. For example, the disciplinary role of debt can have a positive impact on managerial behavior, leading to managerial investment in projects with positive net present value [24]. This is because corporate debt requires firm managers to generate cash to meet interest and principal obligations; thus, managers' willingness to undergo monitoring by external financing markets signals their prudent use of firm capital [25]. R&D projects undertaken under a high debt ratio thus are expected to create firm value because of the effective outside monitoring. Consistent with this viewpoint, a previous study finds that R&D expenditures of firms with a high debt ratio create significantly positive abnormal returns [26].

We revisit the conundrum by analyzing cross-listing events on major U.S. stock exchanges, a new perspective never used to study the impact of financial leverage (i.e., debt ratio) on R&D investment. The previous studies indicate that firms implement cross-listing introductions to obtain an international reputation and greater financial resources [4,27,28]. These cross-listing activities positively advance both firm growth and corporate value. This is especially true considering that U.S. stock exchanges have been recognized as the most representative in the world, where many foreign businesses from different countries eager to cross-list attempt to do so [12,13]. A successful ADR cross-listing can significantly enhance a firm's reputation and convince the external capital market that the firms have improved their debt capacity. Further, due to the strict regulations of the United States Securities and Exchange Commission (SEC), a successful cross-listing can signify that firms have advanced their competitiveness and financial soundness. The reputational advantage of successful cross-listing facilitates an increase in leverage ratio higher than before undertaking the cross-listing. Due to the importance of R&D investments for firms' sustainability and long-term prosperity, we consider that cross-listing firms take advantage

of the increased debt capacity to fund more R&D investments relative to other activities. These arguments result in the succeeding hypotheses.

**Hypothesis 1 (H1).** *Foreign firms launch the ADR cross-listing (as successful issue of ADR in the U.S. stock exchanges significantly increases a firm's reputation) to increase the use of debt financing to an even higher proportion (i.e., raise their leverage ratio higher by utilizing the reputation effect brought by the successful issue of ADR) compared with the time before cross-listing in the U.S. stock exchanges.*

**Hypothesis 2 (H2).** *When cross-listing firms increase the leverage ratio, they use a greater amount of debt to conduct more R&D investments.*

Finally, due to the increasingly competitive globalized environment, we argue that the aggressive strategy of cross-listing firms that greatly increase their debt financing to fund more R&D investments also prompts their industrial rivals to adopt similar strategies as responses. As the perspective of product market competition states, for a firm that has highly differentiated products, customers become highly reliant on continuous support from this firm, which enhances the switching cost of customers and consequently the competitive strength of firms [6]. The literature shows that firms who adopt aggressive R&D investment strategies typically survive in an industrial environment characterized by a highly competitive industry structure [15]. Under such a competitive environment, for one firm that successfully cross-lists to fund more R&D signals than opponents, then its R&D capacity is enhanced due to better access to international resources. We think that industrial rivals similarly increase their R&D investment to avoid being outraced by focal firms that increase financial leverage to fund more R&D investment. Thus, we have the argumen<sup>t</sup> as follows:

**Hypothesis 3 (H3):** *The aggressive R&D financing strategy (a significant increase in R&D investments using greater financial leverage) of cross-listing firms arouses a contagion effect pushing industrial rivals to also enhance their R&D investments in response.*

#### **3. Research Methodology**

#### *3.1. Sample Selection*

These sample firms consisted of stocks traded outside the U.S. that announced their first ADR programs to list on the U.S. stock exchanges including AMEX, NASDAQ, and NYSE. These sample firms were obtained from the Bank of New York. Following the related literature on financial leverage, we did not include financial firms with SIC codes from 6000 to 6999 and utilities with SIC code from 4900 to 4999 into the sample. To avoid other impacts that contaminate our findings, we excluded firms that trade Level I ADR (OTC), privately placed ADR, and offshore ADR (SEC Rule 144A/Regulations) [29]. Further, we eliminated cross-listing firms if their financial information was unavailable from the Center for Research in Securities Prices (CRSP) database and the Compustat database.

We then used this process to adopt the firms increasing the amount of their debt financing that is, those who raised significant debts compared to their existing firm assets before undertaking cross-listing. This procedure helped to ensure that our sample firms could raise abundant debts via cross-listing and had these financial resources to expand R&D expenditures. The measurement of debt financing was calculated as:

$$\text{Debt Financing} = (\text{Long-term Debt}\_0 - \text{Long-term Debt}\_{-1}) / \text{Asset}\_{-1} \tag{1}$$

Following the definition of debt financing as in [10], we measured debt financing as the difference between long-term debts in the cross-listing year and long-term debts in the prior year and then divided by lagged firm assets (the unit of percentage).

Because this study concentrated on the competition in the market, the samples were further restricted to obey these criteria: (i) the minimum of debt financing in year 0 (the year of the ADR event undertaking) was 2% of the amount of firm assets in year −1 (the year prior to the ADR event launching); (ii) the minimum in an industry was two firms; (iii) the minimum in the market share was 1%; (iv) we could acquire their R&D expenditures in the Compustat database from year −1 to year 0 (named as year [−1, 0]); and (v) firms were not involved in any mergers and acquisitions in year 0.

Finally, we collected the sample of rival firms in the U.S. stock markets including AMEX, NASDAQ, and NYSE from 2010 to 2019. The rival firms belonged to U.S. corporations and their four-digit SIC codes were the same as the four-digit SIC codes of the cross-listing firms [30–32]. We adopted these firms to be the sample firms and rival firms. The samples of 215 firm events raising the amount of debt financing in the period 2010–2019 were identified. Because of these constraints, the minimum in every event window was two years. Thus, the competitive impact in this study could be attributed to the chosen event during the following two years.

#### *3.2. Descriptions of Variables*
