The Effects of Cash Holdings on Future Firm Value through the Mediating Effect of Research and Development (R&D) Investment

Abstract

This study empirically analyzes the effect of cash holdings on future firm value through the mediation effect of R&D (research and development) investment for Korean firms listed on the KOSPI from 2000 to 2016 using fixed effects panel regression analyses. The sample firms of 6,923 non-financial are classified into large firms and small ones depending on the firm size showing financial constraints. To estimate the effect of cash holdings on future firm value through the mediation effect of R&D investment, this thesis employs the model of Baron and Kenny (1986) by first analyzing the direct effect of cash holdings on future firm value, assessing then the effect of cash holdings on the R&D investment of firms and then evaluating the indirect effect or mediation effect of the R&D investment of firms on future firm value. Major results of this study can be summarized as follows. The cash holdings rate has a positive and significant effect on future firm value, implying that firms with higher cash holdings rate show higher future firm value. Also, the cash holdings rate has a negative and significant effect on R&D investment, implying that firms with a higher cash holdings rate show lower R&D investment. because firms use their cash holdings to invest in R&D. In conclusion, the positive effect of cash holdings on future firm value rises through its mediation effect of R&D investment. However, this mediation effect of R&D investment is evident in large firms only.