Cash holdings, competition, and innovation

Evgeny Lyandres, Berardino Palazzo

Research output: Contribution to journalArticleResearchpeer-review

41 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)1823-1861
Number of pages39
JournalJournal of Financial and Quantitative Analysis
Volume51
Issue number6
DOIs
Publication statusPublished - Dec 2016
Externally publishedYes

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