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Working Paper
Why Do Innovative Firms Hold So Much Cash? Evidence from Changes in State R&D Tax Credits
This paper uses the staggered changes of R&D tax credits across U.S. states and over time as a quasi-natural experiment to examine the impact of innovation on corporate liquidity. By generating plausibly independent variation in firms' incentive to invest in R&D, we are able to assess the empirical importance of specific theories of the link between innovation and corporate liquidity. Firms increase (decrease) their cash to asset ratios by about one and a half percentage point when their home state increases (cuts) R&D tax credits. These baseline difference-in-differences estimates hold up to ...