ARTICLE | Review of Economic Dynamics | Online Published in  January 2021

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 <a href="https://www.sciencedirect.com/topics/economics-econometrics-and-finance/spillover-effect" title="Learn more about spillover from ScienceDirect" s ai-generated topic pages" times new roman", times, stixgeneral, "cambria math", "lucida sans unicode", "microsoft sans serif", "segoe ui symbol", "arial unicode ms", serif; font-size: 18px;" style="box-sizing: border-box; margin: 0px; padding: 0px; background-color: transparent; text-decoration-line: none; color: rgb(12, 125, 187); word-break: break-word; font-family: NexusSerif, Georgia, ">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.