Abstract
This study examines the effect of technology spillovers on firms’ cash holdings. It finds that
firms facing greater technology spillovers hold higher cash balances. This effect is more
pronounced among financially constrained firms and for firms that are likely to benefit more
from diffused technology, e.g., those have newer patents, are more profitable, face better growth
opportunities and are associated with greater product market fluidity. The spillover impact
remains strong when product market competition and own-firm innovations are accounted for.
Overall, our study identifies technology spillovers as an important factor in determining
corporate cash policy.
Valuation Insight
Qiu and Wan point out that to generate value in technological competition, firms need to maintain higher levels of liquidity to be able to absorb diffused knowledge as it arises and to react aggressively to emergent competitive threats. Empirical results support this perspective.