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R&D Dynamics and Corporate Cash Saving

Author

Listed:
  • Xiaodan Gao

    (Renmin University)

  • Jake Zhao

    (Peking University)

Abstract

High-tech firms hold substantial cash reserves. We build a parsimonious industry equilibrium model with endogenous productivity to study high-tech firms' cash-saving policy and explore its role in innovation. The model incorporates multiple well-cited explanations in the literature and examines which factors are the main determinants of high-tech firms' saving behavior. We find that innovation uncertainty is the major driver, followed by knowledge spillover and financial frictions. Market competition has non-monotonic effects, while R&D adjustment costs play a relatively minor role. We also find that even if the productivity process is transitory, firms manage to save enough to reduce R&D distortions from financial frictions. (Copyright: Elsevier)

Suggested Citation

  • Xiaodan Gao & Jake Zhao, 2022. "R&D Dynamics and Corporate Cash Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 263-285, January.
    • Handle: RePEc:red:issued:20-370
    DOI: 10.1016/j.red.2021.02.008
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    1. Zhang, Xiang & Zhou, Han, 2022. "The effect of market competition on corporate cash holdings: An analysis of corporate innovation and financial constraint," International Review of Financial Analysis, Elsevier, vol. 82(C).
    2. Ryosuke Fujitani & Masazumi Hattori & Tomohide Mineyama, 2024. "Passive and Proactive Motivations of Cash Holdings," Working Papers e200, Tokyo Center for Economic Research.

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    More about this item

    Keywords

    Corporate cash saving; R&D investment; R&D adjustment costs; Financial frictions; Knowledge spillover; Innovation uncertainty; Market competition;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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