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The Effects of Future Capital Investment and R & D Expenditures on Firms' Liquidity
Author(s) -
Baum Christopher F.,
Caglayan Mustafa,
Talavera Oleksandr
Publication year - 2013
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12048
Subject(s) - market liquidity , economics , monetary economics , investment (military) , cash , fixed investment , capital (architecture) , finance , financial capital , human capital , capital formation , market economy , archaeology , politics , political science , law , history
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.