First Mover Advantage, Time to Finance, and Cash Holdings

66 Pages Posted: 25 May 2017 Last revised: 30 Jan 2020

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

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: December 9, 2019

Abstract

We examine the strategic role of cash in a two-stage competition model featuring a first-mover advantage in product markets and time delays in outside financing. Due to the joint effect of the first-mover advantage, time to finance, market profitability, participation cost, and the arrival rate of investment opportunities, large cash holdings can arise in equilibrium in both concentrated and diffuse industries, leading to a rich relation between industry concentration and cash holdings. The model also reveals novel interactions of these drivers of cash holdings that are consistent with empirical evidence. Furthermore, despite that cash is held to enable fast responses to investment opportunities, the correlation between cash holdings and realized investment is low. Our model provides an explanation for the large variation in cash holdings across industries and over time, and the strong correlation between cash holdings and R&D.

Keywords: cash holding, first-mover advantage, time to finance, financing friction, product market competition, R&D

JEL Classification: G30, G32

Suggested Citation

Ma, Liang and Mello, Antonio S. and Wu, Youchang, First Mover Advantage, Time to Finance, and Cash Holdings (December 9, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2973581 or http://dx.doi.org/10.2139/ssrn.2973581

Liang Ma

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

1014 Greene Street
Columbia, SC 29208
United States
803-777-6366 (Phone)

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

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)

Youchang Wu (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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