Innovation and Corporate Cash Holdings in the Era of Globalization

Author/Editor:

Konrad Adler ; JaeBin Ahn ; Mai Chi Dao

Publication Date:

January 18, 2019

Electronic Access:

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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.

Series:

Working Paper No. 19/17

Subject:

English

Publication Date:

January 18, 2019

ISBN/ISSN:

9781484392164/1018-5941

Stock No:

WPIEA2019017

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

62

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