TY - JOUR
T1 - Cash holdings, competition, and innovation
AU - Lyandres, Evgeny
AU - Palazzo, Berardino
N1 - Publisher Copyright:
© Michael G. Foster School of Business, University of Washington 2016.
PY - 2016/12/1
Y1 - 2016/12/1
N2 - We demonstrate theoretically and empirically that strategic considerations are important in shaping the 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 the 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, even more so when competition is expected to be intense.
AB - We demonstrate theoretically and empirically that strategic considerations are important in shaping the 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 the 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, even more so when competition is expected to be intense.
UR - http://www.scopus.com/inward/record.url?scp=85007319536&partnerID=8YFLogxK
U2 - 10.1017/S0022109016000697
DO - 10.1017/S0022109016000697
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AN - SCOPUS:85007319536
SN - 0022-1090
VL - 51
SP - 1823
EP - 1861
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 6
ER -