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The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity

  • Christopher F. Baum
  • Mustafa Caglayan
  • Oleksandr Talavera

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 firms, we find that firms in all three countries 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.

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File URL: http://hdl.handle.net/10.1111/roie.12048
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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 21 (2013)
Issue (Month): 3 (08)
Pages: 459-474

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Handle: RePEc:bla:reviec:v:21:y:2013:i:3:p:459-474
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