R&D and High Cash Holdings in U.S.

Abstract

This paper re-examines the factors that have contributed to the dramatic increase in the average cash-to-assets ratio in U.S. firms since 1980. The analysis first shows that this increase is driven almost entirely by the increase in cash-to-assets ratio of R&D intensive firms. Second, the biggest increase in cash holdings over the last three decades has been concentrated in financially constrained R&D intensive firms in competitive industries with volatile cash flows. Third, using exogenous variation in competition, the evidence supports that intensified global-wide competition significantly contributes to the increased cash holdings of R&D firms, but not constrained non-R&D firms. Fourth, this R&D-driven cash phenomenon is robust across groups of firms, and thus is not industry-specific. Finally, the data provides little support for the reduction in debt capacity as a potential explanation for the linkage between R&D and cash. Overall, this work suggests that the cash holdings puzzle might be driven by a key mechanism — a revolution of financing among R&D intensive firms confronted with increasingly intensified competition.