Why Do Innovative Firms Hold More Cash? The International Evidence
Using 8,379 innovative firms from 23 non U.S. countries over 1990 2012, we find that firms with higher innovation efficiency hoard more cash. To establish causality, we use a differences in differences approach based on country patent reforms and legalization of same sex marriage. We also find that innovatively efficient firms use cash to alleviate financial constraints, invest in future R&D, and exploit innovation opportunities. They increase cash holdings by saving from cash flows and paying out less. The result is stronger for firms with better governance, in industries with higher innovation competition, and in countries that encourage competitiveness more and provide higher human capital.