Why Innovative Firms Sit on So Much Cash
The doubling of corporate cash since 1980 is, to a striking degree, a story about R&D.
American companies hold far more cash than they used to. The average cash-to-assets ratio of U.S. firms more than doubled between 1980 and 2012, a trend that has drawn attention from economists and policymakers alike. This research ties a large part of it to innovation.
In 1980, the average firm held about 4 cents of cash for every dollar of R&D spending. By 2012, that figure had climbed to about 60 cents. The rising sensitivity of cash holdings to R&D, together with the growth of R&D spending itself, explains over 20 percent of the increase in aggregate cash holdings.
Why hoard? Research is hard to finance externally, costly to interrupt, and uncertain in its payoffs. The evidence points to intensified domestic and global competition as an important reason R&D-intensive firms increasingly self-insure with cash.
The next time a technology company's cash pile makes headlines, part of the explanation sits on its income statement, in the research budget.
The Takeaway
R&D and cash are complements. Firms that live on innovation buffer it with cash, and that behavior explains a meaningful share of the corporate cash buildup.