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Corporate Liquidity Management and Future Investment Expenditures

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Author Info

  • Christopher F Baum

    () (Boston College, DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • Oleksandr Talavera

    () (School of Economics, University of East Anglia)

Abstract

The paper explores factors that lead to accumulation or decumulation of firms' cash reserves. In particular, we empirically examine whether additional future fixed capital and R&D investment expenditures induce firms to change their liquidity ratio while considering the role of market imperfections. Implementing a dynamic framework on a panel of US, UK and German companies, we find that firms make larger adjustments to cash holdings when they plan additional future R&D rather than fixed capital investment expenditures. This behavior is particularly prevalent among financially constrained firms that are heavily involved in R&D activities. We also show that the cash flow sensitivity of cash is substantially higher for financially constrained firms than for their unconstrained counterparts in all three countries.

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Bibliographic Info

Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia AEP Discussion Papers in Economics with number 2010_01.

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Date of creation: 21 Oct 2010
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Handle: RePEc:uea:aepppr:2010_1

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Related research

Keywords: cash holdings; fixed investment; R&D investment; dynamic panel regressions;

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  1. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
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