The Bright Side of Cash Holdings: Innovation Efficiency

58 Pages Posted: 18 Aug 2014 Last revised: 28 Jan 2016

See all articles by Zhen Wang

Zhen Wang

Shanghai University of Finance and Economics

K.C. John Wei

Hong Kong Polytechnic University

Wei Zhang

Shanghai University of Finance and Economics

Date Written: January 26, 2016

Abstract

We find that firms with higher cash-to-assets ratios obtain more patents and patent citations for a given amount of research and development expenditures. We propose that large cash reserves increase managerial incentives to innovate by reducing the risk to their career from undertaking innovative projects. To establish causality, we employ two quasi-natural experiments to identify exogenous stimulation of innovation. Difference-in-differences estimations support the causal impact of cash holdings on innovation efficiency. Further analysis reveals that the effect of cash holdings on innovation is stronger for firms with tighter financial constraints, lower institutional ownership, or poorer managerial compensation incentives.

Keywords: Cash holdings; Innovation; Tolerance for failure; Patents; Patent citations

JEL Classification: O31, G32

Suggested Citation

Wang, Zhen and Wei, Kuo-Chiang (John) and Zhang, Wei, The Bright Side of Cash Holdings: Innovation Efficiency (January 26, 2016). 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2482229 or http://dx.doi.org/10.2139/ssrn.2482229

Zhen Wang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Wei Zhang (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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