Corporate R&D intensity and high cash holdings: post-crisis analysis

This paper examines the effect of R&D investment on firms’ level cash holdings in the UK market after the financial market crisis, using the trade-off model and the pecking order model as a theoretical backdrop. For this purpose, we employ a sample of UK listed non-financial no-utility firms throughout 2010–2018. Our findings indicate that R&D spending provides a reasonable explanation for UK firms’ increased cash ratio during post-crisis. Using Fama and French’s (Industry costs of equity. J Financ Econ 43(2): 153–193, 1997) classification, we conduct cross-sectional linear regression analysis for industry and firm groups’ sub-samples. The analysis provides evidence of considerable heterogeneity in terms of cash holding and investment spending across industries. What is more, technology and healthcare firms have contributed to the increase in cash levels. The findings reveal a positive and significant effect of R&D intensity on cash holdings, while R&D-intensive firms hoard cash driven by industry concentration. We confirm our findings’ persistence after performing various additional analyses and robustness checks. This is the first study to provide empirical evidence in the post-crisis era on how R&D influences firm-level cash holdings in the UK market setting.