The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity |
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| Authors: | Christopher F. Baum Mustafa Caglayan Oleksandr Talavera |
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| Affiliation: | 1. +1-617-552-3673+1-617-552-2308;2. Department of Economics, Boston College, , Chestnut Hill, MA, 02467 USA;3. DIW Berlin, , 10117 Berlin, Germany;4. Department of Economics, University of Sheffield, , Sheffield, S1 4DT UK;5. Durham Business School, Durham University, , Durham, DH1 3LB UK |
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| Abstract: | The paper explores factors that lead to accumulation or decumulation of firms' cash reserves. In particular, the paper empirically examines whether additional future fixed capital and R&D investment expenditures induce firms to change their liquidity ratio while considering the role of market imperfections. Implementing a dynamic framework on a panel of US, UK, and German firms, it is found that firms in all three countries make larger adjustments to cash holdings when they plan additional future R&D rather than fixed capital investment expenditures. This behavior is particularly prevalent among financially constrained firms. |
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