Cash holdings and R&D smoothingJournal of Corporate Finance
Publication VersionAccepted Manuscript
AbstractThe sharp increase in R&D investment in recent decades has important but unexplored implications for corporate liquidity management. Because R&D has high adjustment costs and is financed with volatile sources, it is very expensive for firms to adjust the flow of R&D in response to transitory finance shocks. The main contribution of this paper is to directly examine whether firms use cash reserves to smooth their R&D expenditures. We estimate dynamic R&D models and find that firms most likely to face financing frictions rely extensively on cash holdings to smooth R&D. In particular, our estimates suggest that young firms used cash holdings to dampen the volatility in R&D by approximately 75% during the 1998–2002 boom and bust in equity issues. Firms less likely to face financing frictions appear to smooth R&D without the use of costly cash holdings. Our findings provide new insights into the value of liquidity and the financing of intangible investment, and suggest that R&D smoothing with cash reserves is now important for understanding cash management for a substantial fraction of publicly traded firms.
Copyright OwnerElsevier B.V.
Citation InformationJames R. Brown and Bruce C. Petersen. "Cash holdings and R&D smoothing" Journal of Corporate Finance Vol. 17 Iss. 3 (2011) p. 694 - 709
Available at: http://works.bepress.com/james-brown/16/