The effects of cash holdings on R&D smoothing of innovative small and medium sized enterprises

This paper shows evidence that innovative small and medium sized enterprises (SMEs) use more cash holdings to fund R&D investment in the existence of asymmetric information. Innovative SMEs also use more cash holdings to fund asset-counted R&D investment than cost-counted R&D investment, because the intangible assets created by asset-counted R&D investment may act as an innovative driver that can have a larger multiplier effect on the firm value. Moreover, innovative SMEs use more cash holdings to smooth R&D investment in the existence of the financial constraints measured by proxy variables such as capital market accessibility and credit rating level. These findings suggest new policy implications for how cash holdings can be particularly valuable for the R&D smoothing of innovative SMEs.