Too Much Liquidity? Seemingly Excess Cash for Innovative Firms

Abstract

We show that more cash allows innovative firms facing financing constraints to undertake more research and development projects and that this phenomenon has been more pronounced since 1980. In contrast to the secular increase in the level of cash holdings, average excess cash has not increased appreciably. We analyze excess cash disposition and document a strong relation between excess cash and research and development spending. Finally, our results suggest that increased difficulty in valuing research and development might be a source of financing frictions. These findings imply that “seemingly excess cash” has played an increasingly important role in mitigating underinvestment in innovation.

Keywords: cash holdings, excess cash disposition, financing constraints, research and development investments, value of research and development

JEL Classification: G30, G32, O30