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Industry Competition, Winner's Advantage, and Cash Holdings

55 Pages Posted: 11 Aug 2013 Last revised: 26 Mar 2014

See all articles by Liang Ma

Liang Ma

University of South Carolina - Darla Moore School of Business

Antonio S. Mello

University of Wisconsin-Madison - Department of Finance, Investment and Banking; European Corporate Governance Institute (ECGI)

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: March 25, 2014

Abstract

We examine the strategic role of cash in industries with significant R&D, and the variation of cash holdings and R&D intensity across such industries. Firms compete to innovate but must also finance to bring innovations to the market. The first successful launcher of a new product enjoys an advantage. Outside financing takes time. Cash holdings, R&D intensity, and industry concentration are determined endogenously in equilibrium. Both cash holdings and R&D intensity increase with the winner's advantage and time delay in outside financing, and decrease with entry costs. Empirical patterns of industry cash holdings and R&D intensity support the model predictions.

Keywords: Cash holdings, Innovation, Competition, Winner's Advantage

JEL Classification: G32, G30

Suggested Citation

Ma, Liang and Mello, Antonio S. and Wu, Youchang, Industry Competition, Winner's Advantage, and Cash Holdings (March 25, 2014). Available at SSRN: https://ssrn.com/abstract=2308164 or http://dx.doi.org/10.2139/ssrn.2308164

Liang Ma

University of South Carolina - Darla Moore School of Business ( email )

HOME PAGE: http://sites.google.com/site/liangmaweb/research

Antonio S. Mello

University of Wisconsin-Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3423 (Phone)
608-265-4195 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Youchang Wu (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

HOME PAGE: http://www.youchangwu.com

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