The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity

16 Pages Posted: 16 Jul 2013

See all articles by Christopher F. Baum

Christopher F. Baum

Boston College - Department of Economics

Mustafa O. Caglayan

University of Sheffield

Oleksandr Talavera

University of Birmingham

Date Written: August 2013

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.

Suggested Citation

Baum, Christopher (Kit) F. and Caglayan, Mustafa O. and Talavera, Oleksandr, The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity (August 2013). Review of International Economics, Vol. 21, Issue 3, pp. 459-474, 2013, Available at SSRN: https://ssrn.com/abstract=2294290 or http://dx.doi.org/10.1111/roie.12048

Christopher (Kit) F. Baum (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3673 (Phone)
617-552-2308 (Fax)

Mustafa O. Caglayan

University of Sheffield ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

Oleksandr Talavera

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

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