Innovation and Corporate Cash Holdings in the Era of Globalization

January 18, 2019

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Format: Chicago

Konrad Adler, JaeBin Ahn, and Mai Dao. Innovation and Corporate Cash Holdings in the Era of Globalization, (USA: International Monetary Fund, 2019) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Asset and liability management, Currencies, Exports, Imports, International trade, Liquidity indicators, Liquidity management, Money, Production, Productivity

Keywords: Cash amount, Cash flow, Cash holding, Cash holdings, Cash to asset ratio, Currencies, Dummy variable, Estimation result, Exports, Firm FE, Firm's sales share, Global, Imports, Increase in cash holding, International trade, Liquidity demand, Liquidity management, Operating cash flow, Productivity, Productivity draw, R&D, Shock measure, Variation in cash holding, WP

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/017
Stock No:

WPIEA2019017
ISBN:

9781484392164
ISSN:

1018-5941

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