Campus Units

Finance

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

7-2014

Journal or Book Title

Journal of Financial Intermediation

Volume

24

Issue

4

First Page

441

Last Page

465

DOI

10.2139/ssrn.2465404

Abstract

We study how firms engaged in both R&D and fixed investment manage liquidity and adjust real investment during the recent financial crisis. Among firms with positive R&D expenditures, cuts to fixed investment in the crisis are typically far more severe than cuts to R&D. These firms allocate cash reserves to buffer R&D but do not use cash to protect fixed investment. Some firms appear to go so far as to allow the stock of fixed assets to fall to stabilize R&D. The use of cash holdings and fixed assets to protect R&D is particularly strong among firms most likely to face financing frictions at the start of the crisis. We only find evidence that firms use cash to buffer fixed investment when we expand the sample to include firms with no R&D spending to compete for funds. Our study provides direct evidence on the real effects of liquidity management, highlights a key benefit of precautionary cash reserves, and illustrates the adjustments firms make to navigate a financial crisis.

Comments

This is an accepted manuscript of an article from Brown, James R. and Petersen, Bruce C., Which Investments Do Firms Protect? Liquidity Management and Real Adjustments When Access to Finance Falls Sharply (July 3, 2014). Doi: 10.2139/ssrn.2465404. Posted with permission.

Copyright Owner

Elsevier B.V.

Language

en

File Format

application/pdf

Published Version

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