IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v41y2016icp280-303.html
   My bibliography  Save this article

The cost of innovation: R&D and high cash holdings in U.S. firms

Author

Listed:
  • He, Zhaozhao
  • Wintoki, M. Babajide

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.

Suggested Citation

  • He, Zhaozhao & Wintoki, M. Babajide, 2016. "The cost of innovation: R&D and high cash holdings in U.S. firms," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 280-303.
    • Handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:280-303
    DOI: 10.1016/j.jcorpfin.2016.10.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119916301560
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2016.10.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gustavo Manso, 2011. "Motivating Innovation," Journal of Finance, American Finance Association, vol. 66(5), pages 1823-1860, October.
    2. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 309-340.
    3. Comin, Diego & Mulani, Sunil, 2009. "A theory of growth and volatility at the aggregate and firm level," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1023-1042, November.
    4. Philippe Aghion & John Van Reenen & Luigi Zingales, 2013. "Innovation and Institutional Ownership," American Economic Review, American Economic Association, vol. 103(1), pages 277-304, February.
    5. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228, National Bureau of Economic Research, Inc.
    6. Hyunbae Chun & Jung-Wook Kim & Jason Lee & Randall Morck, 2004. "Patterns of Comovement: The Role of Information Technology in the U.S. Economy," NBER Working Papers 10937, National Bureau of Economic Research, Inc.
    7. Bronwyn Hall, 2004. "The financing of research and development," Chapters, in: Anthony Bartzokas & Sunil Mani (ed.), Financial Systems, Corporate Investment in Innovation, and Venture Capital, chapter 2, Edward Elgar Publishing.
    8. Bronwyn H. Hall & Adam B. Jaffe & Manuel Trajtenberg, 2001. "The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools," NBER Working Papers 8498, National Bureau of Economic Research, Inc.
    9. Viral Acharya & Sergei A. Davydenko & Ilya A. Strebulaev, 2012. "Cash Holdings and Credit Risk," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3572-3609.
    10. Giroud, Xavier & Mueller, Holger M., 2010. "Does corporate governance matter in competitive industries?," Journal of Financial Economics, Elsevier, vol. 95(3), pages 312-331, March.
    11. Vikas A. Aggarwal & David H. Hsu, 2014. "Entrepreneurial Exits and Innovation," Management Science, INFORMS, vol. 60(4), pages 867-887, April.
    12. Antonio Falato & Dalida Kadyrzhanova & Jae W. Sim, 2013. "Rising intangible capital, shrinking debt capacity, and the US corporate savings glut," Finance and Economics Discussion Series 2013-67, Board of Governors of the Federal Reserve System (U.S.).
    13. Hirschey, Mark & Skiba, Hilla & Wintoki, M. Babajide, 2012. "The size, concentration and evolution of corporate R&D spending in U.S. firms from 1976 to 2010: Evidence and implications," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 496-518.
    14. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    15. Laurent Frésard & Philip Valta, 2016. "How Does Corporate Investment Respond to Increased Entry Threat?," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(1), pages 1-35.
    16. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, vol. 105(3), pages 661-682.
    17. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    18. Bronwyn H. Hall & Adam Jaffe & Manuel Trajtenberg, 2005. "Market Value and Patent Citations," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 16-38, Spring.
    19. repec:oup:rfinst:v:25:y::i:12:p:3572-3609 is not listed on IDEAS
    20. David Hirshleifer & Angie Low & Siew Hong Teoh, 2012. "Are Overconfident CEOs Better Innovators?," Journal of Finance, American Finance Association, vol. 67(4), pages 1457-1498, August.
    21. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
    22. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    23. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    24. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
    25. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    26. Almeida, Heitor & Campello, Murillo, 2010. "Financing Frictions and the Substitution between Internal and External Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 589-622, June.
    27. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    28. Gerard Hoberg & Gordon Phillips, 2010. "Real and Financial Industry Booms and Busts," Journal of Finance, American Finance Association, vol. 65(1), pages 45-86, February.
    29. Gerard Hoberg & Gordon Phillips & Nagpurnanand Prabhala, 2014. "Product Market Threats, Payouts, and Financial Flexibility," Journal of Finance, American Finance Association, vol. 69(1), pages 293-324, February.
    30. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    31. Erwan Morellec & Boris Nikolov & Francesca Zucchi, 2013. "Competition, Cash Holdings, and Financing Decisions," Swiss Finance Institute Research Paper Series 13-72, Swiss Finance Institute.
    32. Petro Lisowsky & Leslie Robinson & Andrew Schmidt, 2013. "Do Publicly Disclosed Tax Reserves Tell Us About Privately Disclosed Tax Shelter Activity?," Journal of Accounting Research, Wiley Blackwell, vol. 51(3), pages 583-629, June.
    33. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    34. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    35. Bernard, Andrew B. & Jensen, J. Bradford & Schott, Peter K., 2006. "Trade costs, firms and productivity," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 917-937, July.
    36. Brown, James R. & Petersen, Bruce C., 2011. "Cash holdings and R&D smoothing," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 694-709, June.
    37. David McLean, R., 2011. "Share issuance and cash savings," Journal of Financial Economics, Elsevier, vol. 99(3), pages 693-715, March.
    38. Lemmon, Michael & Roberts, Michael R., 2010. "The Response of Corporate Financing and Investment to Changes in the Supply of Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 555-587, June.
    39. Haushalter, David & Klasa, Sandy & Maxwell, William F., 2007. "The influence of product market dynamics on a firm's cash holdings and hedging behavior," Journal of Financial Economics, Elsevier, vol. 84(3), pages 797-825, June.
    40. Paul J. Irvine & Jeffrey Pontiff, 2009. "Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1149-1177, March.
    41. Paul J. Irvine & Jeffrey Pontiff, 2009. "Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1149-1177.
    42. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Li, Xiafei & Luo, Di, 2020. "Increase in cash holdings of U.S. firms: The role of healthcare and technology industries," Journal of Business Research, Elsevier, vol. 118(C), pages 286-298.
    2. Gyimah, Daniel & Siganos, Antonios & Veld, Chris, 2021. "Effects of financial constraints and product market competition on share repurchases," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    3. Ahrends, Meike & Drobetz, Wolfgang & Puhan, Tatjana Xenia, 2018. "Cyclicality of growth opportunities and the value of cash holdings," Journal of Financial Stability, Elsevier, vol. 37(C), pages 74-96.
    4. Yang, Huan, 2021. "Institutional dual holdings and risk-shifting: Evidence from corporate innovation," Journal of Corporate Finance, Elsevier, vol. 70(C).
    5. Qiu, Jiaping & Wan, Chi, 2015. "Technology spillovers and corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 115(3), pages 558-573.
    6. Almaghrabi, Khadija S., 2023. "Local product market competition and investment home bias," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    7. Chang, Ching-Hung & Chen, Sheng-Syan & Chen, Yan-Shing & Peng, Shu-Cing, 2019. "Commitment to build trust by socially responsible firms: Evidence from cash holdings," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 364-387.
    8. Wang, Jimin & Ho, Choy Yeing (Chloe) & Shan, Yuan George, 2024. "Does cybersecurity risk stifle corporate innovation activities?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    9. David McLean, R., 2011. "Share issuance and cash savings," Journal of Financial Economics, Elsevier, vol. 99(3), pages 693-715, March.
    10. Machokoto, Michael & Gyimah, Daniel & Ntim, Collins G., 2021. "Do peer firms influence innovation?," The British Accounting Review, Elsevier, vol. 53(5).
    11. Boubaker, Sabri & Saffar, Walid & Sassi, Syrine, 2018. "Product market competition and debt choice," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 204-224.
    12. Zhang, Wei, 2015. "R&D investment and distress risk," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 94-114.
    13. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    14. Nguyen, Justin Hung & Qiu, Buhui, 2022. "Right-to-Work laws and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 76(C).
    15. Li, Tongxia & Ang, Tze Chuan ‘Chewie’ & Lu, Chun, 2023. "Employment protection and the provision of trade credit," Journal of Banking & Finance, Elsevier, vol. 155(C).
    16. Campello, Murillo & Gao, Janet, 2017. "Customer concentration and loan contract terms," Journal of Financial Economics, Elsevier, vol. 123(1), pages 108-136.
    17. Xede, James & Simon Peter Dak-Adzaklo, Cephas & Ofosu, Emmanuel & Wise Dodzidenu Adza, Solomon, 2023. "Competition laws, external financing and investment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    18. Dou, Winston Wei & Ji, Yan & Wu, Wei, 2021. "Competition, profitability, and discount rates," Journal of Financial Economics, Elsevier, vol. 140(2), pages 582-620.
    19. Chan, Konan & Lin, Yueh-Hsiang & Wang, Yanzhi, 2017. "Limits-to-arbitrage, investment frictions, and innovation anomalies," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 1-14.
    20. Ma, Liang & Mello, Antonio S. & Wu, Youchang, 2020. "First-mover advantage, time to finance, and cash holdings," Journal of Corporate Finance, Elsevier, vol. 62(C).

    More about this item

    Keywords

    Cash holdings; Competition; Financing constraints; Financing volatility; R&D Investment;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:280-303. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.