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Corporate Liquidity Management and Future Investment Expenditures

Author

Listed:
  • 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.

Suggested Citation

  • Christopher F Baum & Mustafa Caglayan & Oleksandr Talavera, 2010. "Corporate Liquidity Management and Future Investment Expenditures," University of East Anglia Applied and Financial Economics Working Paper Series 001, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:aepppr:2010_1
    as

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    File URL: https://archive.uea.ac.uk/menu/depts/eco/research/RePEc/uea/papers_pdf/UEA-AFE-001.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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