Work

Cash Holdings, Competition, and Innovation

Year: 2016

Type: article

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.

Source: Journal of Financial and Quantitative Analysis

DOI: 10.1017/s0022109016000697

Authors: Evgeny Lyandres, Berardino Palazzo

Institution: Boston University

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3123877693

FWCI: 73.07

Cites: 99

Cited by: 280

Related to: 10