Innovation and Corporate Cash Holdings in the Era of Globalization

Konrad Adler, JaeBin Ahn and Mai Dao

No 2019/017, IMF Working Papers from International Monetary Fund

Abstract: We document a broad-based trend in rising cash holdings of firms across major industrialized countries over the last two decades, a trend that is most pronounced for firms engaged strongly in R&D activities. Our contributions to the literature are twofold. First, we develop a simple model that brings together the insights from modern trade theory (Melitz, 2003) with those of contract theory in corporate finance (Holmström and Tirole, 1998) to show that increased openness to trade can result in rising returns to innovation and in turn greater demand for cash as firms insure against innovation-induced liquidity risk. Second, we derive sharp empirical predictions and find supporting evidence for them using firm-level data across major G7 countries during 1995-2014, a period that saw an unprecedented rise in globalization and business innovation.

Keywords: WP; cash holding; dummy variable; operating cash flow; estimation result; cash holdings; R&D; international trade; shock measure; liquidity demand; firm FE; productivity draw; increase in cash holding; cash flow; cash amount; cash to asset ratio; firm's sales share; variation in cash holding; Currencies; Exports; Liquidity management; Productivity; Imports; Global (search for similar items in EconPapers)
Pages: 62
Date: 2019-01-18
New Economics Papers: this item is included in nep-int and nep-sbm
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Citations: View citations in EconPapers (5)

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