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

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  • 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
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    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

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