Innovative firms’ cash holdings, tax policies, and institutional environments

Financial Management, forthcoming

53 Pages Posted: 15 Aug 2015 Last revised: 6 Dec 2021

See all articles by Fengfei Li

Fengfei Li

Deakin University - Deakin Business School

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: December 3, 2021

Abstract

Based on 21,653 innovative firms from 61 non-U.S. economies, we find a positive relationship between a firm’s innovativeness and cash holdings. This relationship is stronger after the implementation of patent boxes that provide preferential tax treatment for patent income. Moreover, innovative multinationals facing higher repatriation taxes accumulate higher total cash holdings. The positive innovativeness-cash relationship varies with institutional environments and is more pronounced in countries with higher R&D tax credits, less developed financial markets, better governance, stronger shareholder rights, more technicians, better infrastructure, greater investment freedom, and in industries with fiercer competition and longer innovation cycles. Innovative firms with higher cash holdings invest more in R&D and generate more patents. Overall, our findings provide insights into the driving forces underlying the large cash accumulation in innovative firms worldwide.

Keywords: innovation, cash holdings, patent box, repatriation tax, R&D tax credit, institutional environment

JEL Classification: F23; G30; G38; H25; O31

Suggested Citation

Li, Fengfei and Lin, Tse-Chun, Innovative firms’ cash holdings, tax policies, and institutional environments (December 3, 2021). Financial Management, forthcoming, Available at SSRN: https://ssrn.com/abstract=2643536 or http://dx.doi.org/10.2139/ssrn.2643536

Fengfei Li (Contact Author)

Deakin University - Deakin Business School ( email )

Australia

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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