Cash Holdings, Competition, and Innovation

58 Pages Posted: 12 Mar 2012 Last revised: 2 Nov 2015

See all articles by Evgeny Lyandres

Evgeny Lyandres

Tel Aviv University; Boston University

Berardino Palazzo

Board of Governors of the Federal Reserve System

Date Written: April 7, 2015


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.

Suggested Citation

Lyandres, Evgeny and Palazzo, Berardino, Cash Holdings, Competition, and Innovation (April 7, 2015). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: or

Evgeny Lyandres (Contact Author)

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
6400241 (Fax)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

Berardino Palazzo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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