**1. Introduction**

The prior literature indicates that firms with sufficient funds to invest in research and development (R&D) can create sustainable development advantages and accumulate in-tangible assets [1–4]. This study aims to investigate the relationship between financial leverage and R&D investment. Financial leverage is conceptualized as the debt-to-assets ratio which describes the source of firm financing from debt relative to equity. Opler and Titman [5] consider that it is important for firms to take debt financing on R&D investment. R&D capacity is critical to the long-term sustainability of firms, as it develops firms' abilities to enhance their product uniqueness and novelty, which increases customer loyalty and their switching cost to rival firms. Thus, customers tend to be highly concerned about the firm's long-term sustainability as they are highly dependent on continuous support from the firm [6]. Conversely, if a firm's product is substitutable, it is easy for customers to switch to other suppliers without incurring high switching costs. This suggests that firms should attempt to conduct significant R&D investments to increase their product uniqueness and differentiation from rival firms, as this can increase customers' switching costs and sustain a firm's development advantage.

A grea<sup>t</sup> amount of investment in R&D facilitates the development of greater product uniqueness and increases a firm's competitiveness, but on the other hand, R&D activities are characterized by a high failure rate, particularly those having a high degree of

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**Citation:** Yang, C.-L.; Lai, J.-H. Influence of Cross-Listing on the Relationship between Financial Leverage and R&D Investment: A Sustainable Development Strategy. *Sustainability* **2021**, *13*, 10341. https://doi.org/10.3390/su131810341

Academic Editors: Manuel Au-Yong-Oliveira and Maria José Sousa

Received: 6 August 2021 Accepted: 14 September 2021 Published: 16 September 2021

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**Copyright:** © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

uniqueness [7]. This leads to a contradiction for the relationship between the level of financial leverage and R&D investment. In other words, firms, for the purpose of long-term organizational sustainability, particularly those in highly competitive product markets, should extensively utilize their debt capacity to fund R&D activities to enhance product uniqueness and thus firm competitiveness. By contrast, the high failure rate of R&D may make debt holders, who are not compensated for higher risk taking, hesitate to provide sufficient funding. Thus, the relationship between financial leverage and R&D investment has been found to be controversial in the literature. For the object of long-term organizational sustainability, firms should extensively utilize their debt capacity to fund R&D activities to enhance the uniqueness and innovation of products [8–10], particularly in high-tech environments or highly competitive product markets. Thus, the impact of financial leverage on R&D investment has been found to be controversial in the academic literature.

In the present study, we revisit this important issue by utilizing a unique dataset that explores the influence of cross-listing on the relationship between financial leverage ratio and firm R&D investment. We argue that one important explanation for the extant mixed findings of the relationship between R&D expenditure and leverage ratio is that prior studies do not incorporate the influence of the firm's debt capacity, that is, a firm's ability to increase debts [8–10]. We overcome this problem by targeting firms that conduct cross-listing on major U.S. stock markets to explore this relationship. According to the related literature, the introduction of cross-listing can increase a firm's debt capacity via two paths. First, the issue of American depository receipts (ADRs) implies that firms gain a significant amount of external capital from equity markets, which reduces bankruptcy risk and provides extensive financial slack for managers to raise debt financing [8–11]. Next, by cross-listing, firms must comply with more stringent disclosure requirements and are subjected to stronger laws protecting investors [12,13]. Thus, a successful cross-listing signals the market about firms' improved capital structure. Particularly, considering that U.S. stock exchanges are among the largest capital markets worldwide characterized by sophisticated investors and strict regulations of going public [12,13], it can convince the focal firm's domestic investors and bankers that the firms have improved their financial soundness, thereby facilitating their debt financing.

By observing 215 sample firms outside the U.S. that announced their first ADR programs on major U.S. exchanges during the 2010–2019 period, our study shows that crosslisting firms launch their ADR issues to increase their leverage ratios (i.e., use of debt financing) to higher proportions than before undertaking these ADR issues. The significant increase in financial leverage is accompanied by a significant increase in firms' R&D investments, which subsequently further arouse the intra-industry contagion effect that prompts their opponents to compete with R&D expenditures as responses.

While the extant findings on the relationship between financial leverage ratio and firm R&D investment remain controversial, consequences of this study can contribute to the research stream from a unique perspective, that is, by observing a sample of international businesses that undertook cross-listing on major U.S. stock exchanges. This unique specification allows us to test if a firm is willing to raise leverage to fund R&D investments when possessing the financing ability, and whether the conduct of cross-listing stimulates a rival firm's aggressive R&D financing motive. This view has never been examined in the literature. Our findings should inspire corporations to be eager for a new strategy in R&D investments to develop their sustainability.

The remainder of the study is structured as follows: First, we review the theoretical background and build the hypotheses in Section 2. Next, Section 3 presents the sample selection, variable definitions, and statistics. We then discuss the empirical results in Section 4 and provide the implications in Section 5. Finally, Section 6 gives the conclusions.
