Corporate Liquidity Management and Future Investment Expenditures

Christopher Baum (), Mustafa Caglayan () and Oleksandr Talavera

No 712, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper empirically examines whether additional future fixed capital and R&D investment expenditures induce firms to accumulate cash reserves 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 additions to cash holdings when they plan additional future R&D rather than fixed capital investment expenditures. This behavior is particularly prevalent among small and non-dividend paying 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 the US and the UK, but only marginally higher in Germany.

Keywords: cash holdings; fixed investment; R&D investment; dynamic panel regressions (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec
Date: 2009-09-23
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:712

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