Innovative Firms’ Cash Holdings, Tax Policies, and Institutional Environments

Abstract

Based on 21,653 innovative firms from 61 non-U.S. economies, we find a positive relationship between a firm's innovativeness and cash holdings. This relationship is stronger after the implementation of patent boxes that provide preferential tax treatment for patent income. Moreover, innovative multinationals facing higher repatriation taxes accumulate higher total cash holdings. The positive innovativeness–cash relationship varies with institutional environments and is more pronounced in countries with higher R&D tax credits, less developed financial markets, better governance, stronger shareholder rights, more technicians, better infrastructure, greater investment freedom, and in industries with fiercer competition and longer innovation cycles. Innovative firms with higher cash holdings invest more in R&D and generate more patents. Overall, our findings provide insights into the driving forces underlying the large cash accumulation in innovative firms worldwide.