First Mover Advantage, Time to Finance, and Cash Holdings

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. We show that the first mover advantage, time to finance, competitive pressure, high profitability, and fast arrivals of investment opportunities reinforce each other to generate large cash holdings, and amplify the sensitivity of cash holdings to the cash carrying cost. The equilibrium relation between cash holdings and industry concentration is ambiguous. Our model provides an explanation for the large variation in cash holdings across industries and the increase in cash holdings in recent decades.

Keywords: First Mover Advantage, Time to Finance, Cash Holdings, Competition

JEL Classification: G30, G32