Cash Holdings, Competition, and Innovation

Evgeny Lyandres · Berardino Palazzo

279 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Financial Markets and Investment Strategies Working Capital and Financial Performance

Abstract

We demonstrate theoretically and empirically that strategic considerations are important in shaping cash policies of innovative firms. In our model, firms compete in product markets with uncertain structure using cash as a commitment device to invest in innovation. We show that firms' equilibrium cash holdings are related to expected intensity of competition. The sign and magnitude of this relation depends on firms' financial constraints. Consistent with the strategic motive for hoarding cash, we show that firms' cash holdings are negatively affected by their rivals' cash holding choices, more so when competition is expected to be intense.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 1995What Do We Know about Capital Structure? Some Evidence from International Data 2010New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index 1988Financing Constraints and Corporate Investment 1977INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION 1999The determinants and implications of corporate cash holdings 1977Informational Asymmetries, Financial Structure, and Financial Intermediation

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