Technology spillovers and corporate cash holdings

Abstract

This study examines the effect of technology spillovers on firms’ cash holdings. It finds that firms facing greater technology spillovers hold higher cash balances. This effect is more pronounced among financially constrained firms and for firms that are likely to benefit more from diffused technology, e.g., those have newer patents, are more profitable, face better growth opportunities and are associated with greater product market fluidity. The spillover impact remains strong when product market competition and own-firm innovations are accounted for. Overall, our study identifies technology spillovers as an important factor in determining corporate cash policy. Valuation Insight: Qiu and Wan point out that to generate value in technological competition, firms need to maintain higher levels of liquidity to be able to absorb diffused knowledge as it arises and to react aggressively to emergent competitive threats. Empirical results support this perspective.