Cash Holdings and Innovation Through Acquisitions

Abstract

This paper tests the hypothesis that cash-rich, but low-innovation firms can use acquisitions as a strategy to catch-up on innovation. We examine whether cash-rich, but low-innovation firms can use acquisitions in general, and diversifying acquisitions in particular, to increase innovation inputs (i.e. R&D). We also show that low-innovation, but cash rich firms can respond to industry-shocks, in the form of a M&A wave or a tariff reduction in their industry, by using their cash to acquire a target and increase innovation. These results are consistent with the use of acquisitions to facilitate strategic repositioning in the presence of industry shocks.