The 46 references with contexts in paper Christopher F Baum, Mustafa Caglayan, Oleksandr Talavera (2009) “The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity” / RePEc:boc:bocoec:712

1
Almeida, H. & Campello, M. (2007), ‘Financial constraints, asset tangibility, and corporate investment’,Review of Financial Studies20(5), 1429–1460.
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    As we have discussed above, fixed capital investment leads to the accumulation of pledgeable assets, whereas investment in R&D may not. We expect that a firm that increases its non-pledgeable investment activities would hold more liquid assets than a similar firm whose assets may readily be pledged as collateral. Notably,
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    Almeida & Campello (2007)
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    claim that accumulation of pledgeable assets supports more borrowing and hence more capital expenditures.16Bates et al. (2009), implementing a model where they consider firm-specific factors including fixed capital and R&D expenditures, provide evidence that firms that are R&D-intensive hold greater cash buffers against future shocks to cash flows.

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    Opler et al. (1999) show that cash holdings increase significantly as firms increase their capital expenditures-to-assets ratio as 15Time zero investment opportunities are measured as (I2+I1)/(2I0). 16
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    Almeida & Campello (2007)
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    define tangibility as a function of receivables, inventories and capital stock. They also use a proxy to measure how easily lenders can liquidate the firm and another proxy based on product type (durable/nondurable) of each firm. 10 well as when the R&D-to-sales ratio increases.

2
Almeida, H., Campello, M. & Weisbach, M. (2004), ‘The cash flow sensitivity of cash’, Journal of Finance59(4), 1777–1804.
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    firms’ sources of finance provide an additional source of variation in firms’ behavior.7 We employ the Dynamic Panel Data System-GMM estimator of Blundell & Bond (1998) to allow for the possible endogeneity of the explanatory variables. Our approach considers how changes in future investment expenditures may lead to changes in firms’ liquidity. In contrast to other studies (e.g.,
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    Almeida et al. (2004), Ozkan & Ozkan (2004) and Baum et al. (2008)) and Bates et al. (2009))
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    that consider the level of cash holdings, we consider firms’ cash accumulation and decumulation.8In estimating our models, we take into account firm-level fixed effects and time effects as well as other firm-specific factors.

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    Kim et al. (1998), using a sample of US firms, show that firms facing higher costs of external financing, having more volatile earnings and exhibiting lower returns on assets carry larger stocks of liquid assets. In a similar vein Opler et al. (1999) provide evidence that small firms and firms with strong growth opportunities and riskier cash flows hold larger amounts of cash.13
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    Almeida et al. (2004)
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    show that constrained firms have a positive cash flow sensitivity of cash, while unconstrained firms’ cash balance adjustments are not systematically related to cash flows. Sufi (2009), using a panel of US firms, also shows that the cash flow sensitivity of cash is higher for constrained firms, defined as the lack of access to a line of bank credit.

  3. In-text reference with the coordinate start=19653
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    Perhaps the most common approach in the literature is the use of Tobin’sQas a measure of future investment opportunities of firms, although Erickson & Whited (2000) raise several warnings about this strategy. For instance, Riddick & Whited (2009), after correcting for measurement error associated with Tobin’sQ, estimate negative propensities to save out of cash flow.
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    Almeida et al. (2004)
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    replace the standardQmeasure in their basic regressions model with the average growth of investment over two periods to capture the impact of current and future investment opportunities on cash holdings.15In a similar vein, Baum et al. (2009) study firms’ leverage decisions by employing not current, but realized future values of the level of capital investment.

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    In total, our sample consists of an unbalanced panel of about 32,000 manufacturing firmyear observations over the period from 1989–2007.21Prior to estimating our models we apply a number of sample selection criteria which roughly follow
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    Almeida et al. (2004).
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    First, we retain companies which have not undergone substantial changes in their composition during the sample period (e.g., participation in a merger, acquisition or substantial divestment). As these phenomena are not observable in the data, we calculate the growth rate of each firm’s total assets and sales, and trim the annual distribution of these growth rates exceeding 20Data ava

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    We should also note that German firms maintain the highest fixed investment rates and the highest short-term debt among the three countries. 4. Empirical Results 4.1. Contrast with the Model of
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    Almeida et al. (2004)
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    Our model can be considered an extension of that developed by Almeida et al. (2004) to estimate the change in cash holdings (∆C) caused by changes in cash flow and Tobin’s Q, controlling for firm size.24In their model, investment opportunities are proxied by Tobin’s Q.

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    We should also note that German firms maintain the highest fixed investment rates and the highest short-term debt among the three countries. 4. Empirical Results 4.1. Contrast with the Model of Almeida et al. (2004) Our model can be considered an extension of that developed by
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    Almeida et al. (2004) to
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    estimate the change in cash holdings (∆C) caused by changes in cash flow and Tobin’s Q, controlling for firm size.24In their model, investment opportunities are proxied by Tobin’s Q. Our data do not include firms’ market value, so we cannot directly estimate their model.

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    definition and received quantitatively similar results. 23In total, 104 firms have been removed. 24We are grateful to an anonymous reviewer for suggesting this discussion be added to the manuscript. 17 proxy Tobin’s Q with the ratio of realized future investment to current investment, defined in their footnote 20 as (I1+I2)/(2×I0). To illustrate how our modeling strategy differs from that of
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    Almeida et al. (2004),
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    we present fixed effects results using US, German and UK firms’ data in Table 2, which shows results from estimating their Equation (8), page 1787, augmented withactual futureR&D, ∆NWC, ∆ShortDebt, ∆RD, and ∆FixInv.

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    For comparability, we ignore issues of potential endogeneity and employ OLS with firm-level fixed effects. Column (1) presents results for US companies. The common coefficients are quantitatively similar to
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    Almeida et al. (2004)
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    ’s results. Our US estimates also contain positive and significant coefficients for the coefficients on ∆RDand ∆FixInv. However for the UK and German firms (Columns 2 and 3, respectively), the Almeida–style results contain insignificant coefficients on the planned R&D variable.

3
Almeida, H., Campello, M. & Weisbach, M. S. (2011), ‘Corporate financial and investment policies when future financing is not frictionless’,Journal of Corporate Finance17(3), 675– 693.
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    Hence, our work complements the prior literature, as we show that accumulation of cash holdings is related to firms’ future investment activities, but is most sensitive to planned R&D activities. These implications are forthcoming from the analytical findings of
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    Almeida et al. (2011),
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    who present several propositions for firms’ choice of liquid vs. illiquid investments, and safe vs. risky assets in the context of future financing constraints. We should also note that recent research highlights the importance of funds raised from the equity markets to finance R&D expenditures.

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    of cash holdings, we consider firms’ cash accumulation and decumulation.8In estimating our models, we take into account firm-level fixed effects and time effects as well as other firm-specific factors. As the impact of additional investment expenditures may differ across categories of firms due to the presence 5See, for instance, the first two ‘untested direct model implications’ in Table 1 of
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    Almeida et al. (2011).
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    6Consideration of new equity issuance in our US sample shows that it represents, for the median firmyear, 0.41% of total assets and 4.94% of cash stocks. Thus, we may conclude that adjustments of cash stocks largely reflect use of internal funds. 7Baum et al. (2011) find significant differences in the financial constraints faced by firms in different countries depending on the fina

4
Bates, T. W., Kahle, K. M. & Stulz, R. M. (2009), ‘Why do U.S. firms hold so much more cash than they used to?’,Journal of Finance64(5), 1985–2021.
Total in-text references: 10
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    We conjecture that an increase in future R&D expenditures will require firms to increase their cash holdings by more than that of fixed capital expenditures. Our reasoning, similar to that of the earlier literature including
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    Brown & Petersen (2011), Hall & Lerner (2009), Bates et al. (2009), and Opler & Titman (1994),
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    can be explained as follows. In contrast to fixed capital investment, R&D investment contributes to the stock of intangible capital and cannot be used as collateral. Thus, firms undergoing large R&D expenditures do not have the financial flexibility of firms that mainly invest in physical capital, as the latter firms may pledge their fixed investment as collateral.

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    Some studies in the literature have considered the impact of R&D and fixed investment expenditures along with several potential firm-specific variables which may also affect firms’ cash holding behavior. In particular,
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    Bates et al. (2009)
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    examine why cash holdings of US firms increased. They suggest that the precautionary demand for cash can plausibly explain the secular increase in cash holdings, and show that firms whose R&D expenditures increase hold more cash, while cash is generally negatively correlated with fixed capital 2As Hall & Lerner (2009) stress (p. 5), a multi-year purchase of machinery c

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    In contrast to these studies’ findings, Brown & Petersen (2011) investigate the factors that affect firms’ R&D expenditures and show that in order to smooth their R&D activities, firms build up their cash reserves when cash flow is available while drawing them down when cash flow is reduced.3In this context, our study is closer to those of
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    Bates et al. (2009) and Opler et al. (1999).
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    However, we investigate firms’ cash holding behavior in a dynamic setting as we evaluate the impact of firms’ future investment activities on this process, and we deal with issues of endogeneity that are not addressed in those studies.

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    investment projects when external 3Brown & Petersen (2011) do not investigate firms’ cash accumulation, but rather consider the role of changes in cash holdings required to smooth their R&D expenditures. 4For instance, they show that in the first year after an IPO, R&D expenditures increase by 18.5 cents for every dollar of funding raised. 5 sources of finance may not be available.5For instance,
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    Bates et al. (2009)
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    provide evidence from a panel of US manufacturing firms that although firms’ cash holdings have generally increased in recent years, this is not due to new equity issuance.6They show that the observed increase is a reflection of firm characteristics and that the data are consistent with the presence of precautionary savings.

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    firms’ sources of finance provide an additional source of variation in firms’ behavior.7 We employ the Dynamic Panel Data System-GMM estimator of Blundell & Bond (1998) to allow for the possible endogeneity of the explanatory variables. Our approach considers how changes in future investment expenditures may lead to changes in firms’ liquidity. In contrast to other studies (e.g.,
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    Almeida et al. (2004), Ozkan & Ozkan (2004) and Baum et al. (2008)) and Bates et al. (2009))
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    that consider the level of cash holdings, we consider firms’ cash accumulation and decumulation.8In estimating our models, we take into account firm-level fixed effects and time effects as well as other firm-specific factors.

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    Thus, we may conclude that adjustments of cash stocks largely reflect use of internal funds. 7Baum et al. (2011) find significant differences in the financial constraints faced by firms in different countries depending on the financial structure in which they operate. 8
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    Bates et al. (2009)
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    consider models of the level and change in the cash ratio. However, their reliance on OLS in a context with several plausibly endogenous regressors, including capital spending and R&D expenditures, may cast doubt on their results. 6 of financial frictions, we consider three sample categorizations based on firms’ size, their dividend payout ratio and their dividend status

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    Determinants of Cash Holdings Keynes (1936) suggests the transaction costs motive and the precautionary motive are the two major reasons why firms hold cash buffers.9To attain a certain level of liquidity, although a firm manager could raise capital by selling assets or issuing new debt or equity, there are significant costs associated with any of these strategies.10
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    Bates et al. (2009)
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    show that over the years, the transactions-based demand for funds declined as both firms and financial intermediaries developed more efficient transactions technologies. However, 9Keynes (1936) also considers that firms may accumulate cash for speculative purposes.

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    debt or equity, there are significant costs associated with any of these strategies.10Bates et al. (2009) show that over the years, the transactions-based demand for funds declined as both firms and financial intermediaries developed more efficient transactions technologies. However, 9Keynes (1936) also considers that firms may accumulate cash for speculative purposes.
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    Bates et al. (2009)
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    discuss two other possible motives, based on taxes and agency costs. The tax motive is due to Foley et al. (2007) who suggest that tax considerations might provide incentives for multinational companies to hoard large amounts of cash.

  9. In-text reference with the coordinate start=20726
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    We expect that a firm that increases its non-pledgeable investment activities would hold more liquid assets than a similar firm whose assets may readily be pledged as collateral. Notably, Almeida & Campello (2007) claim that accumulation of pledgeable assets supports more borrowing and hence more capital expenditures.16
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    Bates et al. (2009),
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    implementing a model where they consider firm-specific factors including fixed capital and R&D expenditures, provide evidence that firms that are R&D-intensive hold greater cash buffers against future shocks to cash flows.

  10. In-text reference with the coordinate start=25461
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    ∆NWCit +μi+τt+-it whereiindexes the firm,tthe year, ∆Cashis a ratio of the change in cash and short term investment to beginning-of-period total assets ((Casht−Casht−1)/TAt−1), andCashFlow is defined as income before extraordinary items plus depreciation, also normalized by total assets. The key coefficients of interest areα3andα4, which determine the response 17Also see
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    Brown & Petersen (2011), Bates et al. (2009) and Opler & Titman (1994)
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    along these lines. 12 of liquid assets’ holdings to changes inactual futureR&D, ∆RD, and fixed capital investment, ∆FixInv, respectively.18Additionally, the decision to hold cash crucially depends on changes in net working capital (∆NWC) and changes in short term debt (∆ShortDebt), which could be considered as cash substitutes.

5
Baum, C. F., Caglayan, M., Stephan, A. & Talavera, O. (2008), ‘Uncertainty determinants of corporate liquidity’,Economic Modelling25(5), 833–849.
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    firms’ sources of finance provide an additional source of variation in firms’ behavior.7 We employ the Dynamic Panel Data System-GMM estimator of Blundell & Bond (1998) to allow for the possible endogeneity of the explanatory variables. Our approach considers how changes in future investment expenditures may lead to changes in firms’ liquidity. In contrast to other studies (e.g.,
    Exact
    Almeida et al. (2004), Ozkan & Ozkan (2004) and Baum et al. (2008)) and Bates et al. (2009))
    Suffix
    that consider the level of cash holdings, we consider firms’ cash accumulation and decumulation.8In estimating our models, we take into account firm-level fixed effects and time effects as well as other firm-specific factors.

7
Baum, C. F., Stephan, A. & Talavera, O. (2009), ‘The effects of uncertainty on the leverage of nonfinancial firms’,Economic Inquiry47(2), 216–225.
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    Almeida et al. (2004) replace the standardQmeasure in their basic regressions model with the average growth of investment over two periods to capture the impact of current and future investment opportunities on cash holdings.15In a similar vein,
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    Baum et al. (2009)
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    study firms’ leverage decisions by employing not current, but realized future values of the level of capital investment. We follow a similar approach in this study. While acknowledging the importance of expected investment opportunities, few researchers distinguish how different types of investment affect corporate liquidity.

8
Bester, H. (1985), ‘Screening vs. rationing in credit markets with imperfect information’, American Economic
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    That is, an increase in fixed investment behavior does not necessarily lead to a significant change in cash holdings. This evidence could be explained by the pledgeability of investments in physical capital.
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    Bester (1985)
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    argues that collateral can be used as a signaling mechanism to distinguish between high-risk and low-risk borrowers. In contrast, R&D capital has limited collateral value and it is a riskier type of investment.

9
Blundell, R. & Bond, S. (1998), ‘Initial conditions and moment restrictions in dynamic panel data models’,Journal of Econometrics87, 115–143.
Total in-text references: 1
  1. In-text reference with the coordinate start=10367
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    Cross-country differences in tax regimes, investment incentives, and firms’ sources of finance provide an additional source of variation in firms’ behavior.7 We employ the Dynamic Panel Data System-GMM estimator of
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    Blundell & Bond (1998) to
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    allow for the possible endogeneity of the explanatory variables. Our approach considers how changes in future investment expenditures may lead to changes in firms’ liquidity. In contrast to other studies (e.g.

10
Bond, S., Harhoff, D. & Reenen, J. V. (2005), ‘Investment, R&D and financial constraints in Britain and Germany’,Annales d’Economie et de Statistique79-80, 433–460.
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    However, in none of these studies do researchers consider firms’ demand for liquidity that arises fromfutureinvestment activities. There is also a sizable body of research that focuses on the importance of firms’ financial constraints and R&D activities.
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    Bond et al. (2005)
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    suggest that financial constrains affect UK firms’ decision to engage in R&D activity, but not the level of their R&D expenditures. In a recent paper, Li (2011) argues that financially constrained R&D–intensive firms are more likely to terminate R&D projects.

11
Bovha-Padilla, S., Damijan, J. P. & Konings, J. (2009), Financial constraints and the cyclicality of R&D investment:evidence from Slovenia, LICOS Discussion Papers 23909, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven.
Total in-text references: 1
  1. In-text reference with the coordinate start=22928
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    Using a sample of European firms, Brown et al. (2011) show strong evidence that the availability of finance matters for R&D even after controlling for the use of external equity financing and smoothing R&D with cash reserves. Evidence of the effects of financial constrains on R&D activities is also observed for Dutch (Mohnen et al. (2007)) and Slovenian
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    (Bovha-Padilla et al. (2009))
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    companies. In our study, we investigate the impact of two types of firms’ future investment activity on the accumulation of cash holdings: R&D investmentversusinvestment in physical capital. As discussed in the introduction, the former may be considered as intangible capital investment, which has a substantially higher marginal cost of external financing because of its limited pledgeability.

12
Brown, J. R., Martinsson, G. & Petersen, B. C. (2011), Do financing constraints matter for R&D?, Discussion Paper 1684731, SSRN.
Total in-text references: 1
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    Czarnitzki & Hottenrott (2011) find that the availability of internal funds has a more sizable impact on R&D investment, relative to capital investment, for German firms, with the effect being particularly strong for small companies. Using a sample of European firms,
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    Brown et al. (2011)
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    show strong evidence that the availability of finance matters for R&D even after controlling for the use of external equity financing and smoothing R&D with cash reserves. Evidence of the effects of financial constrains on R&D activities is also observed for Dutch (Mohnen et al. (2007)) and Slovenian (Bovha-Padilla et al. (2009)) companies.

13
Brown, J. R. & Petersen, B. C. (2011), ‘Cash holdings and R&D smoothing’,Journal of
Total in-text references: 5
  1. In-text reference with the coordinate start=4744
    Prefix
    We conjecture that an increase in future R&D expenditures will require firms to increase their cash holdings by more than that of fixed capital expenditures. Our reasoning, similar to that of the earlier literature including
    Exact
    Brown & Petersen (2011), Hall & Lerner (2009), Bates et al. (2009), and Opler & Titman (1994),
    Suffix
    can be explained as follows. In contrast to fixed capital investment, R&D investment contributes to the stock of intangible capital and cannot be used as collateral. Thus, firms undergoing large R&D expenditures do not have the financial flexibility of firms that mainly invest in physical capital, as the latter firms may pledge their fixed investment as collateral.

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    An earlier, influential study by Opler et al. (1999) also implies that firms’ cash holdings increase significantly as their capital expenditures-to-assets ratio as well as their R&D-to-sales ratio increases. In contrast to these studies’ findings,
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    Brown & Petersen (2011)
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    investigate the factors that affect firms’ R&D expenditures and show that in order to smooth their R&D activities, firms build up their cash reserves when cash flow is available while drawing them down when cash flow is reduced.3In this context, our study is closer to those of Bates et al. (2009) and Opler et al. (1999).

  3. In-text reference with the coordinate start=9006
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    R&D and fixed investment expenditures.4Observing their findings, although one can suggest that funds raised from public offerings can be stored as cash holdings to finance R&D expenditures rather than fixed investment, it is well accepted in the literature that financial frictions require managers to hoard cash due to precautionary motives to continue with investment projects when external 3
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    Brown & Petersen (2011)
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    do not investigate firms’ cash accumulation, but rather consider the role of changes in cash holdings required to smooth their R&D expenditures. 4For instance, they show that in the first year after an IPO, R&D expenditures increase by 18.5 cents for every dollar of funding raised. 5 sources of finance may not be available.5For instance, Bates et al. (2009) provide evidence from a panel of US manu

  4. In-text reference with the coordinate start=21522
    Prefix
    They also use a proxy to measure how easily lenders can liquidate the firm and another proxy based on product type (durable/nondurable) of each firm. 10 well as when the R&D-to-sales ratio increases. More recently,
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    Brown & Petersen (2011)
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    implement dynamic R&D investment models that provide evidence on the importance of cash reserves, particularly for young firms. However, in none of these studies do researchers consider firms’ demand for liquidity that arises fromfutureinvestment activities.

  5. In-text reference with the coordinate start=25461
    Prefix
    ∆NWCit +μi+τt+-it whereiindexes the firm,tthe year, ∆Cashis a ratio of the change in cash and short term investment to beginning-of-period total assets ((Casht−Casht−1)/TAt−1), andCashFlow is defined as income before extraordinary items plus depreciation, also normalized by total assets. The key coefficients of interest areα3andα4, which determine the response 17Also see
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    Brown & Petersen (2011), Bates et al. (2009) and Opler & Titman (1994)
    Suffix
    along these lines. 12 of liquid assets’ holdings to changes inactual futureR&D, ∆RD, and fixed capital investment, ∆FixInv, respectively.18Additionally, the decision to hold cash crucially depends on changes in net working capital (∆NWC) and changes in short term debt (∆ShortDebt), which could be considered as cash substitutes.

15
Campbell, J. Y., Lettau, M., Malkiel, B. G. & Xu, Y. (2001), ‘Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk’,Journal of Finance56(1), 1– 43.
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  1. In-text reference with the coordinate start=16438
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    Although there are some challenges with respect to the modeling of the problem, the methodology that one uses to categorize firms, or the control variables used in the model, it is widely accepted that financial market frictions adversely affect capital investment expenditures of the constrained firms in comparison to unconstrained firms.12 11Along these lines see
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    Campbell et al. (2001), Fama & French (2004) and Irvine & Pontiff (2009).
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    12See Kaplan & Zingales (1997), Kaplan & Zingales (2000), Fazzari et al. (2000), and Erickson & Whited 8 Given the developments in the literature on fixed investment behavior of firms and financial frictions, several researchers implement those methodologies to model firms’ liquidity behavior.

16
Czarnitzki, D. & Hottenrott, H. (2011), ‘R&D investment and financing constraints of small and medium-sized firms’,Small Business Economics36, 65–83.
Total in-text references: 1
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    In a recent paper, Li (2011) argues that financially constrained R&D–intensive firms are more likely to terminate R&D projects. Furthermore, R&D activities increase the risk of financially constrained firms, which exacerbates their financial frictions.
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    Czarnitzki & Hottenrott (2011)
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    find that the availability of internal funds has a more sizable impact on R&D investment, relative to capital investment, for German firms, with the effect being particularly strong for small companies.

17
Dittmar, A. & Mahrt-Smith, J. (2007), ‘Corporate governance and the value of cash holdings’,Journal of Financial Economics83(3), 599–634.
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    However, empirical models that use current investment expenditures do not necessarily cap(2000) for more along these lines. 13Pinkowitz & Williamson (2001) report similar findings for firms in Germany and Japan in addition to those in the US. 14There is also active research that relates the value of cash to corporate governance. For instance
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    Dittmar & Mahrt-Smith (2007) and Harford et al. (2008)
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    present evidence that cash has lower value for firms with weak shareholder rights, pointing out the presence of agency problems. Ozkan & Ozkan (2004), using a panel of UK firms, show that there is a non-monotonic relationship between managerial ownership and cash holdings. 9 ture the effect of future investment.

18
Erickson, T. & Whited, T. M. (2000), ‘Measurement error and the relationship between investment and q’,Journal of Political Economy108(5), 1027–1057.
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    To our knowledge, only Lamont (2000)) has used firms’ investment plans, which more closely address the notion that capital expenditures are largely determined for a multiperiod horizon. However, data on investment plans are very limited. Perhaps the most common approach in the literature is the use of Tobin’sQas a measure of future investment opportunities of firms, although
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    Erickson & Whited (2000)
    Suffix
    raise several warnings about this strategy. For instance, Riddick & Whited (2009), after correcting for measurement error associated with Tobin’sQ, estimate negative propensities to save out of cash flow.

19
Fama, E. F. & French, K. R. (2004), ‘New lists: Fundamentals and survival rates’,Journal of Financial Economics73(2), 229–269.
Total in-text references: 1
  1. In-text reference with the coordinate start=16438
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    Although there are some challenges with respect to the modeling of the problem, the methodology that one uses to categorize firms, or the control variables used in the model, it is widely accepted that financial market frictions adversely affect capital investment expenditures of the constrained firms in comparison to unconstrained firms.12 11Along these lines see
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    Campbell et al. (2001), Fama & French (2004) and Irvine & Pontiff (2009).
    Suffix
    12See Kaplan & Zingales (1997), Kaplan & Zingales (2000), Fazzari et al. (2000), and Erickson & Whited 8 Given the developments in the literature on fixed investment behavior of firms and financial frictions, several researchers implement those methodologies to model firms’ liquidity behavior.

20
Faulkender, M. & Wang, R. (2006), ‘Corporate financial policy and the value of cash’,Journal of Finance61(4), 1957–1990.
Total in-text references: 1
  1. In-text reference with the coordinate start=17741
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    Sufi (2009), using a panel of US firms, also shows that the cash flow sensitivity of cash is higher for constrained firms, defined as the lack of access to a line of bank credit. Khurana et al. (2006), using data from several countries, find that the sensitivity of cash holdings to cash flows decreases with financial development. In a related study,
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    Faulkender & Wang (2006) and Pinkowitz & Williamson (2007)
    Suffix
    present evidence that the value of cash is higher for constrained firms than for unconstrained firms.14 2.2. Effects of Expected Investment Opportunities on Liquidity Although researchers seek to show that firms’ cash holdings will be related to their investment opportunities, there is no consensus on how to capture those effects.

21
Fazzari, S., Hubbard, R. G. & Petersen, B. C. (1988), ‘Financing constraints and corporate investment’,Brookings Papers on Economic Activity19(2), 141–195.
Total in-text references: 1
  1. In-text reference with the coordinate start=15568
    Prefix
    Hence, it should not be surprising to see that those firms which are adversely affected by financial frictions make use of a cash buffer in order to minimize the explicit and implicit costs of liquidity management. The subsequent empirical literature that builds upon the seminal work of
    Exact
    Fazzari et al. (1988)
    Suffix
    helps us to appreciate why internal funds for the so-called ‘financially constrained’ firms is an important determinant of capital or R&D investment behavior. The basic premise in this line of empirical work is to capture the differential impact of cash flow on investment expenditures of firms that are constrainedversusthose that are not.

22
Fazzari, S. M., Hubbard, R. G. & Petersen, B. C. (2000), ‘Investment-cash flow sensitivities are useful: A comment on Kaplan and Zingales’,Quarterly Journal of Economics 115(2), 695–705.
Total in-text references: 1
  1. In-text reference with the coordinate start=16517
    Prefix
    of the problem, the methodology that one uses to categorize firms, or the control variables used in the model, it is widely accepted that financial market frictions adversely affect capital investment expenditures of the constrained firms in comparison to unconstrained firms.12 11Along these lines see Campbell et al. (2001), Fama & French (2004) and Irvine & Pontiff (2009). 12See
    Exact
    Kaplan & Zingales (1997), Kaplan & Zingales (2000), Fazzari et al. (2000), and
    Suffix
    Erickson & Whited 8 Given the developments in the literature on fixed investment behavior of firms and financial frictions, several researchers implement those methodologies to model firms’ liquidity behavior.

23
Foley, C. F., Hartzell, J. C., Titman, S. & Twite, G. (2007), ‘Why do firms hold so much cash? A tax-based explanation’,Journal of Financial Economics86(3), 579–607.
Total in-text references: 1
  1. In-text reference with the coordinate start=13740
    Prefix
    However, 9Keynes (1936) also considers that firms may accumulate cash for speculative purposes. Bates et al. (2009) discuss two other possible motives, based on taxes and agency costs. The tax motive is due to
    Exact
    Foley et al. (2007)
    Suffix
    who suggest that tax considerations might provide incentives for multinational companies to hoard large amounts of cash. The agency motive is argued by Jensen (1986) that entrenched managers prefer to hoard cash, rather than pay dividends, if the firm has poor investment opportunities. 10For instance, see Miller & Orr (1966) who show that firms hold liquid assets as a result of the presence of br

25
Hall, B. H. & Lerner, J. (2009), The financing of R&D and innovation, NBER Working Papers 15325, National Bureau of Economic Research, Inc.
Total in-text references: 2
  1. In-text reference with the coordinate start=4744
    Prefix
    We conjecture that an increase in future R&D expenditures will require firms to increase their cash holdings by more than that of fixed capital expenditures. Our reasoning, similar to that of the earlier literature including
    Exact
    Brown & Petersen (2011), Hall & Lerner (2009), Bates et al. (2009), and Opler & Titman (1994),
    Suffix
    can be explained as follows. In contrast to fixed capital investment, R&D investment contributes to the stock of intangible capital and cannot be used as collateral. Thus, firms undergoing large R&D expenditures do not have the financial flexibility of firms that mainly invest in physical capital, as the latter firms may pledge their fixed investment as collateral.

  2. In-text reference with the coordinate start=6566
    Prefix
    They suggest that the precautionary demand for cash can plausibly explain the secular increase in cash holdings, and show that firms whose R&D expenditures increase hold more cash, while cash is generally negatively correlated with fixed capital 2As
    Exact
    Hall & Lerner (2009)
    Suffix
    stress (p. 5), a multi-year purchase of machinery could be rescheduled in the face of financial exigencies, but it would be much more difficult to temporarily reduce R&D expenditures. They indicate that this is perhaps the most important distinguishing characteristic of R&D investment, and leads to firms smoothing R&D spending over time to retain their skilled human capital. 4 investment.

26
Harford, J., Mansi, S. A. & Maxwell, W. F. (2008), ‘Corporate governance and firm cash holdings’,Journal of Financial Economics87(3), 535–555.
Total in-text references: 1
  1. In-text reference with the coordinate start=18669
    Prefix
    However, empirical models that use current investment expenditures do not necessarily cap(2000) for more along these lines. 13Pinkowitz & Williamson (2001) report similar findings for firms in Germany and Japan in addition to those in the US. 14There is also active research that relates the value of cash to corporate governance. For instance
    Exact
    Dittmar & Mahrt-Smith (2007) and Harford et al. (2008)
    Suffix
    present evidence that cash has lower value for firms with weak shareholder rights, pointing out the presence of agency problems. Ozkan & Ozkan (2004), using a panel of UK firms, show that there is a non-monotonic relationship between managerial ownership and cash holdings. 9 ture the effect of future investment.

27
Irvine, P. J. & Pontiff, J. (2009), ‘Idiosyncratic return volatility, cash flows, and product market competition’,Review of Financial Studies22(3), 1149–1177.
Total in-text references: 1
  1. In-text reference with the coordinate start=16438
    Prefix
    Although there are some challenges with respect to the modeling of the problem, the methodology that one uses to categorize firms, or the control variables used in the model, it is widely accepted that financial market frictions adversely affect capital investment expenditures of the constrained firms in comparison to unconstrained firms.12 11Along these lines see
    Exact
    Campbell et al. (2001), Fama & French (2004) and Irvine & Pontiff (2009).
    Suffix
    12See Kaplan & Zingales (1997), Kaplan & Zingales (2000), Fazzari et al. (2000), and Erickson & Whited 8 Given the developments in the literature on fixed investment behavior of firms and financial frictions, several researchers implement those methodologies to model firms’ liquidity behavior.

28
Jensen, M. C. (1986), ‘Agency costs of free cash flow, corporate finance, and takeovers’, American Economic
Total in-text references: 1
  1. In-text reference with the coordinate start=13911
    Prefix
    Bates et al. (2009) discuss two other possible motives, based on taxes and agency costs. The tax motive is due to Foley et al. (2007) who suggest that tax considerations might provide incentives for multinational companies to hoard large amounts of cash. The agency motive is argued by
    Exact
    Jensen (1986)
    Suffix
    that entrenched managers prefer to hoard cash, rather than pay dividends, if the firm has poor investment opportunities. 10For instance, see Miller & Orr (1966) who show that firms hold liquid assets as a result of the presence of brokerage costs involved in raising funds. 7 the precautionary motive, which emphasizes the costs associated with foregone capital investment opportunities due to fi

29
Kaplan, S. N. & Zingales, L. (1997), ‘Do investment-cash flow sensitivities provide useful measures of financing constraints’,Quarterly Journal of Economics107(1), 196–215. 29
Total in-text references: 1
  1. In-text reference with the coordinate start=16517
    Prefix
    of the problem, the methodology that one uses to categorize firms, or the control variables used in the model, it is widely accepted that financial market frictions adversely affect capital investment expenditures of the constrained firms in comparison to unconstrained firms.12 11Along these lines see Campbell et al. (2001), Fama & French (2004) and Irvine & Pontiff (2009). 12See
    Exact
    Kaplan & Zingales (1997), Kaplan & Zingales (2000), Fazzari et al. (2000), and
    Suffix
    Erickson & Whited 8 Given the developments in the literature on fixed investment behavior of firms and financial frictions, several researchers implement those methodologies to model firms’ liquidity behavior.

30
Kaplan, S. N. & Zingales, L. (2000), ‘Investment-cash flow sensitivities are not valid measures of financing constraints’,Quarterly Journal of Economics115(2), 707–712.
Total in-text references: 1
  1. In-text reference with the coordinate start=16517
    Prefix
    of the problem, the methodology that one uses to categorize firms, or the control variables used in the model, it is widely accepted that financial market frictions adversely affect capital investment expenditures of the constrained firms in comparison to unconstrained firms.12 11Along these lines see Campbell et al. (2001), Fama & French (2004) and Irvine & Pontiff (2009). 12See
    Exact
    Kaplan & Zingales (1997), Kaplan & Zingales (2000), Fazzari et al. (2000), and
    Suffix
    Erickson & Whited 8 Given the developments in the literature on fixed investment behavior of firms and financial frictions, several researchers implement those methodologies to model firms’ liquidity behavior.

31
Keynes, J. M. (1936),The general theory of employment, interest and money, London, Harcourt Brace.
Total in-text references: 3
  1. In-text reference with the coordinate start=2482
    Prefix
    Introduction It is important to understand why firms hold substantial amounts of cash, which earns little or no interest, rather than channelling those funds towards capital investment projects or as dividends to shareholders. In an environment with no market imperfections, firms can tap into financial markets costlessly and need not hold cash
    Exact
    (Keynes (1936))
    Suffix
    as cash has a zero net present investment value (Modigliani & Miller (1958)). However, in the presence of financial frictions, firms do not undertake all positive net present value projects, but rather choose to save funds for transactions or precautionary motives.

  2. In-text reference with the coordinate start=12967
    Prefix
    Section 2 briefly reviews the literature. Section 3 presents the model and describes our data. Section 4 provides the empirical results and Section 5 concludes. 2. Literature Review 2.1. Determinants of Cash Holdings
    Exact
    Keynes (1936)
    Suffix
    suggests the transaction costs motive and the precautionary motive are the two major reasons why firms hold cash buffers.9To attain a certain level of liquidity, although a firm manager could raise capital by selling assets or issuing new debt or equity, there are significant costs associated with any of these strategies.10Bates et al. (2009) show that over the years, the transactio

  3. In-text reference with the coordinate start=13525
    Prefix
    liquidity, although a firm manager could raise capital by selling assets or issuing new debt or equity, there are significant costs associated with any of these strategies.10Bates et al. (2009) show that over the years, the transactions-based demand for funds declined as both firms and financial intermediaries developed more efficient transactions technologies. However, 9
    Exact
    Keynes (1936)
    Suffix
    also considers that firms may accumulate cash for speculative purposes. Bates et al. (2009) discuss two other possible motives, based on taxes and agency costs. The tax motive is due to Foley et al. (2007) who suggest that tax considerations might provide incentives for multinational companies to hoard large amounts of cash.

32
Khurana, I. K., Martin, X. & Pereira, R. (2006), ‘Financial development and the cash flow sensitivity of cash’,Journal of Financial and Quantitative Analysis41(4), 787–808.
Total in-text references: 1
  1. In-text reference with the coordinate start=17569
    Prefix
    amounts of cash.13Almeida et al. (2004) show that constrained firms have a positive cash flow sensitivity of cash, while unconstrained firms’ cash balance adjustments are not systematically related to cash flows. Sufi (2009), using a panel of US firms, also shows that the cash flow sensitivity of cash is higher for constrained firms, defined as the lack of access to a line of bank credit.
    Exact
    Khurana et al. (2006),
    Suffix
    using data from several countries, find that the sensitivity of cash holdings to cash flows decreases with financial development. In a related study, Faulkender & Wang (2006) and Pinkowitz & Williamson (2007) present evidence that the value of cash is higher for constrained firms than for unconstrained firms.14 2.2.

34
Kim, W. & Weisbach, M. S. (2008), ‘Motivations for public equity offers: An international perspective’,Journal of Financial Economics87(2), 281–307.
Total in-text references: 4
  1. In-text reference with the coordinate start=8422
    Prefix
    These implications are forthcoming from the analytical findings of Almeida et al. (2011), who present several propositions for firms’ choice of liquid vs. illiquid investments, and safe vs. risky assets in the context of future financing constraints. We should also note that recent research highlights the importance of funds raised from the equity markets to finance R&D expenditures.
    Exact
    Kim & Weisbach (2008)
    Suffix
    provide evidence that firms who raise funds through IPOs/SEOs experience an increase in their cash holdings, which is then drawn down to finance various activities including R&D and fixed investment expenditures.4Observing their findings, although one can suggest that funds raised from public offerings can be stored as cash holdings to finance R&D expenditures rather than fixed investment, it is

  2. In-text reference with the coordinate start=50907
    Prefix
    In doing so, we also include the lagged ratio of new equity issuance to total assets in the model to investigate whether funds raised from equity issuance will impact firms’ cash accumulation behavior along the lines suggested by
    Exact
    Kim & Weisbach (2008).
    Suffix
    27,28 The inclusion of this variable allows us to consider whether the coefficients associated with future fixed investment and R&D expenditures will be qualitatively affected or not.29 These results, for the baseline model, are presented in Table 7.30Column 1 reports results for the entire set of US firms, while estimates in columns (2)-(5) are based on subsamples of small, large, no-dividend-pay

  3. In-text reference with the coordinate start=53432
    Prefix
    The positive coefficient on new equity issuance suggests that firms use the funds they raise to increase their cash holdings, quite possibly to finance investment expenditures in subsequent years, as
    Exact
    Kim & Weisbach (2008)
    Suffix
    suggest.31However, this effect appears to be weak and we do not explore this idea further, as it is beyond the objective of this paper.32 A potential issue to be considered in future research is the observational similarity between the R&D interaction coefficients of small and large US firms, or dividend-paying or non-paying US firms.

  4. In-text reference with the coordinate start=54626
    Prefix
    The result for US firms could be driven by a number of reasons including the fact 31We thank an anonymous reviewer for suggesting this interpretation. 32It may also be the case that the timing of new equity issuance is driven by market timing issues and underwriters’ recommendations. See
    Exact
    Kim & Weisbach (2008)
    Suffix
    along these lines. 25 that the US firms included in the Global COMPUSTAT database are not really small firms. Another possibility is that US firms might have greater access to external finance than their foreign counterparts, regardless of their size, given the greater development of the private equity and venture capital channels in the US.

35
Lamont, O. A. (2000), ‘Investment plans and stock returns’,Journal of Finance55(6), 2719– 2745.
Total in-text references: 1
  1. In-text reference with the coordinate start=19072
    Prefix
    Ozkan & Ozkan (2004), using a panel of UK firms, show that there is a non-monotonic relationship between managerial ownership and cash holdings. 9 ture the effect of future investment. To our knowledge, only
    Exact
    Lamont (2000))
    Suffix
    has used firms’ investment plans, which more closely address the notion that capital expenditures are largely determined for a multiperiod horizon. However, data on investment plans are very limited. Perhaps the most common approach in the literature is the use of Tobin’sQas a measure of future investment opportunities of firms, although Erickson & Whited (2000) raise several warnings about this

36
Li, D. (2011), ‘Financial constraints, R&D investment, and stock returns’,Review of Financial Studies24(9), 2974–3007.
Total in-text references: 1
  1. In-text reference with the coordinate start=22108
    Prefix
    There is also a sizable body of research that focuses on the importance of firms’ financial constraints and R&D activities. Bond et al. (2005) suggest that financial constrains affect UK firms’ decision to engage in R&D activity, but not the level of their R&D expenditures. In a recent paper,
    Exact
    Li (2011)
    Suffix
    argues that financially constrained R&D–intensive firms are more likely to terminate R&D projects. Furthermore, R&D activities increase the risk of financially constrained firms, which exacerbates their financial frictions.

37
Miller, M. H. & Orr, D. (1966), ‘A model of the demand for money by firms’,Quarterly Journal of Economics80(3), 413–435.
Total in-text references: 1
  1. In-text reference with the coordinate start=14064
    Prefix
    The tax motive is due to Foley et al. (2007) who suggest that tax considerations might provide incentives for multinational companies to hoard large amounts of cash. The agency motive is argued by Jensen (1986) that entrenched managers prefer to hoard cash, rather than pay dividends, if the firm has poor investment opportunities. 10For instance, see
    Exact
    Miller & Orr (1966)
    Suffix
    who show that firms hold liquid assets as a result of the presence of brokerage costs involved in raising funds. 7 the precautionary motive, which emphasizes the costs associated with foregone capital investment opportunities due to financial constraints—as well as managers’ desire to avoid financial embarrassment in the case of an unexpected shortfall in cash flow—still plays an import

38
Modigliani, F. & Miller, M. (1958), ‘The cost of capital, corporate finance, and the theory of investment’,American Economic Review48(3), 261–297.
Total in-text references: 1
  1. In-text reference with the coordinate start=2545
    Prefix
    It is important to understand why firms hold substantial amounts of cash, which earns little or no interest, rather than channelling those funds towards capital investment projects or as dividends to shareholders. In an environment with no market imperfections, firms can tap into financial markets costlessly and need not hold cash (Keynes (1936)) as cash has a zero net present investment value
    Exact
    (Modigliani & Miller (1958)).
    Suffix
    However, in the presence of financial frictions, firms do not undertake all positive net present value projects, but rather choose to save funds for transactions or precautionary motives. In that sense, firms facing market imperfections must choose their level of liquidity at each point in time while taking into account current and future business opportunities.

39
Mohnen, P., Tiwari, A., Palm, F. & Schim van der Loeff, S. (2007), Financial constraint and R&D investment: Evidence from CIS, UNU-MERIT Working Paper Series 011, UNU-
Total in-text references: 1
  1. In-text reference with the coordinate start=22892
    Prefix
    Using a sample of European firms, Brown et al. (2011) show strong evidence that the availability of finance matters for R&D even after controlling for the use of external equity financing and smoothing R&D with cash reserves. Evidence of the effects of financial constrains on R&D activities is also observed for Dutch
    Exact
    (Mohnen et al. (2007)) and
    Suffix
    Slovenian (Bovha-Padilla et al. (2009)) companies. In our study, we investigate the impact of two types of firms’ future investment activity on the accumulation of cash holdings: R&D investmentversusinvestment in physical capital.

41
Myers, S. C. & Majluf, N. S. (1984), ‘Corporate financing and investment decisions when firms have information that investors do not have’,Journal of Financial Economics 13, 187–221.
Total in-text references: 1
  1. In-text reference with the coordinate start=15258
    Prefix
    Hence, we would observe that firms follow a financial hierarchy, or ‘pecking order’, as they first tap cheaper internal sources of funds followed by more expensive alternatives in financing their activities (see Myers (1984) and
    Exact
    Myers & Majluf (1984)).
    Suffix
    Hence, it should not be surprising to see that those firms which are adversely affected by financial frictions make use of a cash buffer in order to minimize the explicit and implicit costs of liquidity management.

42
Nickell, S. (1981), ‘Biases in dynamic models with fixed effects’,Econometrica49, 1417–1426.
Total in-text references: 2
  1. In-text reference with the coordinate start=29252
    Prefix
    To estimate equations (1) and (2) we must take into account the endogeneity of financial and investment decisions. In particular, including the lagged dependent variable as an explanatory variable renders a fixed effects estimator biased and inconsistent (see
    Exact
    Nickell (1981)). To
    Suffix
    overcome this difficulty previous researchers relied heavily on using various GMM-family estimators (e.g. IV or 2SLS). However, quite often the choice of instruments 19As a robustness check, Section 4.3.4 presents a set of regressions which we carry out for separate categories.

  2. In-text reference with the coordinate start=38007
    Prefix
    We believe that adjustment of the firm’s cash buffer stock should be treated as an explicitly dynamic process. The sizable and significant coefficients on the lagged dependent variables in our chosen specifications support that interpretation, rendering a fixed effects model biased (per
    Exact
    Nickell (1981)) and
    Suffix
    inconsistent. 4.2. The Baseline Model We continue our investigation by implementing a dynamic model (Equation 1) for each country to explore the effects of cash flow, lagged change in cash holding, change in future R&D and fixed capital investment expenditures, and changes in non-cash net working capital and short-term debt ratios on firms’ cash holding behavior.

43
Opler, T. C. & Titman, S. (1994), ‘Financial distress and corporate performance’,Journal of Finance49(3), 1015–40.
Total in-text references: 2
  1. In-text reference with the coordinate start=4744
    Prefix
    We conjecture that an increase in future R&D expenditures will require firms to increase their cash holdings by more than that of fixed capital expenditures. Our reasoning, similar to that of the earlier literature including
    Exact
    Brown & Petersen (2011), Hall & Lerner (2009), Bates et al. (2009), and Opler & Titman (1994),
    Suffix
    can be explained as follows. In contrast to fixed capital investment, R&D investment contributes to the stock of intangible capital and cannot be used as collateral. Thus, firms undergoing large R&D expenditures do not have the financial flexibility of firms that mainly invest in physical capital, as the latter firms may pledge their fixed investment as collateral.

  2. In-text reference with the coordinate start=25461
    Prefix
    ∆NWCit +μi+τt+-it whereiindexes the firm,tthe year, ∆Cashis a ratio of the change in cash and short term investment to beginning-of-period total assets ((Casht−Casht−1)/TAt−1), andCashFlow is defined as income before extraordinary items plus depreciation, also normalized by total assets. The key coefficients of interest areα3andα4, which determine the response 17Also see
    Exact
    Brown & Petersen (2011), Bates et al. (2009) and Opler & Titman (1994)
    Suffix
    along these lines. 12 of liquid assets’ holdings to changes inactual futureR&D, ∆RD, and fixed capital investment, ∆FixInv, respectively.18Additionally, the decision to hold cash crucially depends on changes in net working capital (∆NWC) and changes in short term debt (∆ShortDebt), which could be considered as cash substitutes.

44
Opler, T., Pinkowitz, L., Stulz, R. & Williamson, R. (1999), ‘The determinants and implications of corporate cash holdings’,Journal of Financial Economics52, 3–46. 30
Total in-text references: 7
  1. In-text reference with the coordinate start=7008
    Prefix
    They indicate that this is perhaps the most important distinguishing characteristic of R&D investment, and leads to firms smoothing R&D spending over time to retain their skilled human capital. 4 investment. An earlier, influential study by
    Exact
    Opler et al. (1999)
    Suffix
    also implies that firms’ cash holdings increase significantly as their capital expenditures-to-assets ratio as well as their R&D-to-sales ratio increases. In contrast to these studies’ findings, Brown & Petersen (2011) investigate the factors that affect firms’ R&D expenditures and show that in order to smooth their R&D activities, firms build up their cash reserves when cash flow is

  2. In-text reference with the coordinate start=7534
    Prefix
    In contrast to these studies’ findings, Brown & Petersen (2011) investigate the factors that affect firms’ R&D expenditures and show that in order to smooth their R&D activities, firms build up their cash reserves when cash flow is available while drawing them down when cash flow is reduced.3In this context, our study is closer to those of
    Exact
    Bates et al. (2009) and Opler et al. (1999).
    Suffix
    However, we investigate firms’ cash holding behavior in a dynamic setting as we evaluate the impact of firms’ future investment activities on this process, and we deal with issues of endogeneity that are not addressed in those studies.

  3. In-text reference with the coordinate start=17045
    Prefix
    Kim et al. (1998), using a sample of US firms, show that firms facing higher costs of external financing, having more volatile earnings and exhibiting lower returns on assets carry larger stocks of liquid assets. In a similar vein
    Exact
    Opler et al. (1999)
    Suffix
    provide evidence that small firms and firms with strong growth opportunities and riskier cash flows hold larger amounts of cash.13Almeida et al. (2004) show that constrained firms have a positive cash flow sensitivity of cash, while unconstrained firms’ cash balance adjustments are not systematically related to cash flows.

  4. In-text reference with the coordinate start=18152
    Prefix
    Effects of Expected Investment Opportunities on Liquidity Although researchers seek to show that firms’ cash holdings will be related to their investment opportunities, there is no consensus on how to capture those effects. Researchers (e.g.,
    Exact
    Opler et al. (1999))
    Suffix
    often incorporate firms’ current investment expenditures in empirical models to capture the impact of investment opportunities on cash holding behavior. However, empirical models that use current investment expenditures do not necessarily cap(2000) for more along these lines. 13Pinkowitz & Williamson (2001) report similar findings for firms in Germany and Japan in addition to those in the US. 14Th

  5. In-text reference with the coordinate start=20979
    Prefix
    Notably, Almeida & Campello (2007) claim that accumulation of pledgeable assets supports more borrowing and hence more capital expenditures.16Bates et al. (2009), implementing a model where they consider firm-specific factors including fixed capital and R&D expenditures, provide evidence that firms that are R&D-intensive hold greater cash buffers against future shocks to cash flows.
    Exact
    Opler et al. (1999)
    Suffix
    show that cash holdings increase significantly as firms increase their capital expenditures-to-assets ratio as 15Time zero investment opportunities are measured as (I2+I1)/(2I0). 16Almeida & Campello (2007) define tangibility as a function of receivables, inventories and capital stock.

  6. In-text reference with the coordinate start=41788
    Prefix
    In Table 3 the coefficient on the lagged dependent variable for all countries is significant and negative, implying that dynamics of the cash adjustment process are important. Interestingly, our coefficient estimates are very similar to those reported on a firm level by
    Exact
    Opler et al. (1999)
    Suffix
    from their Eqn. 1, a pure autoregressive model of the change in the cash/assets ratio. They find a median coefficient of−0.242 at the firm level.25The table also shows that an increase in cash flow leads to an accumulation of cash for all countries, as its coefficient is positive and significant for all three countries at the 1% level.

  7. In-text reference with the coordinate start=42774
    Prefix
    The Augmented Model The results given in Tables 4, 5 and 6 present our findings for Equation (2) where we model firms’ adjustment of their cash balances for different size, dividend and payout categories, respectively. Each table depicts six models (two per country) where columns 1, 3 and 5 only 25
    Exact
    Opler et al. (1999),
    Suffix
    in their full models, include last period’s deviation from a target cash ratio as an explanatory factor, using several definitions of the target cash ratio. As we are not testing the ‘static tradeoff’ model, we do not include this complication in our dynamic specification. 20 allow the cash flow coefficients to differ across categories.

45
Ozkan, A. & Ozkan, N. (2004), ‘Corporate cash holdings: An empirical investigation of UK companies’,Journal of Banking and Finance28, 2103–2134.
Total in-text references: 2
  1. In-text reference with the coordinate start=10608
    Prefix
    firms’ sources of finance provide an additional source of variation in firms’ behavior.7 We employ the Dynamic Panel Data System-GMM estimator of Blundell & Bond (1998) to allow for the possible endogeneity of the explanatory variables. Our approach considers how changes in future investment expenditures may lead to changes in firms’ liquidity. In contrast to other studies (e.g.,
    Exact
    Almeida et al. (2004), Ozkan & Ozkan (2004) and Baum et al. (2008)) and Bates et al. (2009))
    Suffix
    that consider the level of cash holdings, we consider firms’ cash accumulation and decumulation.8In estimating our models, we take into account firm-level fixed effects and time effects as well as other firm-specific factors.

  2. In-text reference with the coordinate start=18862
    Prefix
    For instance Dittmar & Mahrt-Smith (2007) and Harford et al. (2008) present evidence that cash has lower value for firms with weak shareholder rights, pointing out the presence of agency problems.
    Exact
    Ozkan & Ozkan (2004),
    Suffix
    using a panel of UK firms, show that there is a non-monotonic relationship between managerial ownership and cash holdings. 9 ture the effect of future investment. To our knowledge, only Lamont (2000)) has used firms’ investment plans, which more closely address the notion that capital expenditures are largely determined for a multiperiod horizon.

46
Pinkowitz, L. & Williamson, R. (2001), ‘Bank power and cash holdings: Evidence from Japan’,Review of Financial Studies14(4), 1059–82.
Total in-text references: 1
  1. In-text reference with the coordinate start=18452
    Prefix
    Researchers (e.g., Opler et al. (1999)) often incorporate firms’ current investment expenditures in empirical models to capture the impact of investment opportunities on cash holding behavior. However, empirical models that use current investment expenditures do not necessarily cap(2000) for more along these lines. 13
    Exact
    Pinkowitz & Williamson (2001)
    Suffix
    report similar findings for firms in Germany and Japan in addition to those in the US. 14There is also active research that relates the value of cash to corporate governance. For instance Dittmar & Mahrt-Smith (2007) and Harford et al. (2008) present evidence that cash has lower value for firms with weak shareholder rights, pointing out the presence of agency problems.

47
Pinkowitz, L. & Williamson, R. (2007), ‘What is the market value of a dollar of corporate cash?’,Journal of Applied Corporate Finance19(3), 74–81.
Total in-text references: 1
  1. In-text reference with the coordinate start=17741
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    Sufi (2009), using a panel of US firms, also shows that the cash flow sensitivity of cash is higher for constrained firms, defined as the lack of access to a line of bank credit. Khurana et al. (2006), using data from several countries, find that the sensitivity of cash holdings to cash flows decreases with financial development. In a related study,
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    Faulkender & Wang (2006) and Pinkowitz & Williamson (2007)
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    present evidence that the value of cash is higher for constrained firms than for unconstrained firms.14 2.2. Effects of Expected Investment Opportunities on Liquidity Although researchers seek to show that firms’ cash holdings will be related to their investment opportunities, there is no consensus on how to capture those effects.

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Riddick, L. A. & Whited, T. M. (2009), ‘The corporate propensity to save’,Journal of Finance64(4), 1729–1766.
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    Perhaps the most common approach in the literature is the use of Tobin’sQas a measure of future investment opportunities of firms, although Erickson & Whited (2000) raise several warnings about this strategy. For instance,
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    Riddick & Whited (2009),
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    after correcting for measurement error associated with Tobin’sQ, estimate negative propensities to save out of cash flow. Almeida et al. (2004) replace the standardQmeasure in their basic regressions model with the average growth of investment over two periods to capture the impact of current and future investment opportunities on cash holdings.15In a similar vein, Baum e

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Roodman, D. (2009a), ‘How to do xtabond2: An introduction to difference and system GMM in Stata’,Stata Journal9(1), 86–136.
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    We report the number of instruments used in each specification, which should be well below the number of observations entering the regression. In all cases, the number of instruments is no greater than 18% of the number of firm-years, and on average is between 8–11% of the number of firm-years. As
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    Roodman (2009a)
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    suggests, it is usually necessary to limit the lags of endogenous variables used as ‘GMM-style’ instruments. We have done so, with lag lengths between 2 and 4 periods applied to the endogenous variables.

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Roodman, D. (2009b), ‘A note on the theme of too many instruments’,Oxford Bulletin of Economics and Statistics71(1), 135–158.
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    In a dynamic panel data context, we expect first order serial correlation, but should not be able to detect second-order serial correlation if the instruments are appropriately uncorrelated with the errors. Our instrument sets have been chosen to ensure that the orthogonality conditions are satisfied, and that we have avoided the issue of ‘too many instruments’ discussed in
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    Roodman (2009b).
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    In particular, it is well known that p-values of 1.00 for HansenJtests indicate that the test of overidentifying restrictions lacks sufficient power to reject its null in the presence of too many instruments.

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Sufi, A. (2009), ‘Bank lines of credit in corporate finance: An empirical analysis’,Review of
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  1. In-text reference with the coordinate start=17389
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    In a similar vein Opler et al. (1999) provide evidence that small firms and firms with strong growth opportunities and riskier cash flows hold larger amounts of cash.13Almeida et al. (2004) show that constrained firms have a positive cash flow sensitivity of cash, while unconstrained firms’ cash balance adjustments are not systematically related to cash flows.
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    Sufi (2009),
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    using a panel of US firms, also shows that the cash flow sensitivity of cash is higher for constrained firms, defined as the lack of access to a line of bank credit. Khurana et al. (2006), using data from several countries, find that the sensitivity of cash holdings to cash flows decreases with financial development.