ARTICLE | Review of Economic Dynamics | Vol.43, 2022

Abstract

High-tech firms hold substantial cash reserves. We build a parsimonious industry equilibrium model with endogenous productivity to study high-tech firms' cash-saving policy and explore its role in innovation. The model incorporates multiple well-cited explanations in the literature and examines which factors are the main determinants of high-tech firms' saving behavior. We find that innovation uncertainty is the major driver, followed by knowledge spillover and financial frictions. Market competition has non-monotonic effects, while R&D adjustment costs play a relatively minor role. We also find that even if the productivity process is transitory, firms manage to save enough to reduce R&D distortions from financial frictions. (C) 2021 Elsevier Inc. All rights reserved.