eThesis - School of Business electronic theses

OBJECTIVES OF THE STUDY: This thesis studies the strategic dimension of cash and the mechanisms through which innovation and R&D competition and influence firm cash holdings. I focus on examining why innovating firms hold more cash - what is the strategic role of cash in product market competition, and what is the interaction between competition and financing frictions? I investigate whether the higher cash-to- asset ratios for research-intensive industries are caused solely by precautionary motivation such as R&D smoothing or also strategic motivations related to the nature of competition in innovative industries.

DATA: The sample consists of public European companies, excluding financial and utilities companies, over the period of 1990 to 2012. The final sample covers 5,073 individual firms from 17 different countries.

FINDINGS OF THE STUDY: The key findings of this thesis indicate that there is a pronounced and robust difference in the cash policies of high R&D firms compared to non-innovating firms. The results suggest both competition and financing constraints play a significant role in driving this effect. I document evidence that these relatively high cash ratios are considered optimal, as the market value of marginal cash is significantly higher for innovation-intensive firms. Examining the differences in the uses of cash for different types of firms, I find that the allocation of cash between R&D and acquisitions differs for larger versus smaller firms.