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Cash-flow Uncertainty and Corporate Innovation
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TitleCash-flow Uncertainty and Corporate Innovation  
AuthorLiu Bo,Li Zhisheng,Wang Hongli and Yang Jinqiang  
OrganizationUniversity of Electronic Science and Technology of China; Zhongnan University of Economics and Law; Shanghai University of Finance and Economics; 
Key WordsCash-flow Uncertainty; Winner’s Advantage; Market Friction; R&D Strategy; Funding Effect; Precautionary Effect 
AbstractWe extend the extant framework by integrating the characteristics of winner’s advantage and market friction in innovative industry, and investigate the innovative firm’s optimal tradeoff between R&D and cash holding, and explore the impact of cash-flow uncertainty on innovative firm’s R&D strategy and firm value. The results indicate that, when winner’s advantage is strong, innovative firm focuses on the “opportunity” side of cash-flow uncertainty, and the “funding effect” dominates to spur more aggressive R&D, and finally the cash-flow uncertainty increases the firm value. On the contrary, when winner’s advantage is weak, innovative firm reinforces the “risk” side of cash-flow uncertainty, and the “precautionary effect” dominates to push the innovative firm to cut R&D, and finally the cash-flow uncertainty decrease the firm value. Specifically, the marginal utility of cash flow is large around the financial constraints boundary, and the cash-flow uncertainty will significantly mitigate the financial constraint and increase the firm value. In addition, the existence of market friction could make the cash-flow uncertainty cast more complicated effect upon innovative firm’s R&D strategy and firm value. In the context of China's implementation of innovation-driven development strategy, this paper provides important theoretical basis for innovative firms’ effective management of cash flow uncertainty and reasonable R&D decisions. 
Serial NumberWP964 
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