The Cost of Innovation: R&D and High Cash Holdings in U.S. Firms

49 Pages Posted: 8 Sep 2013 Last revised: 11 Oct 2016

See all articles by Zhaozhao He

Zhaozhao He

University of New Hampshire - Department of Accounting & Finance

M. Babajide Wintoki

University of Kansas - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 9, 2016

Abstract

We show that R&D investment explains a significant portion of the increase in the average cash-to-assets ratio of U.S. firms, which more than doubled between 1980 and 2012. In 1980, an average firm held $0.04 in cash for $1.00 of R&D spending, but this had increased to $0.60 by 2012. The increasing sensitivity of cash holdings to R&D investment and the increase in R&D spending of the typical firm explain over 20% of the increase in aggregate cash holdings. Intensified domestic and global competition appears to be an important explanation for the increased propensity of R&D-intensive firms to hoard cash.

Keywords: Cash Holdings, Competition, Financing Constraints, Financing Volatility, R&D Investment

JEL Classification: G30, G32, O30

Suggested Citation

He, Zhaozhao and Wintoki, Modupe Babajide, The Cost of Innovation: R&D and High Cash Holdings in U.S. Firms (October 9, 2016). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2322029 or http://dx.doi.org/10.2139/ssrn.2322029

Zhaozhao He (Contact Author)

University of New Hampshire - Department of Accounting & Finance ( email )

Durham, NH 03824
United States
603-862-3355 (Phone)

HOME PAGE: http://sites.google.com/site/zhaozhaohe

Modupe Babajide Wintoki

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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