Managing liquidity in research-intensive firms: signaling and cash flow effects of patents and alliance activities
Article first published online: 26 FEB 2009
Copyright © 2009 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 30, Issue 6, pages 659–678, June 2009
How to Cite
Levitas, E. and McFadyen, M. A. (2009), Managing liquidity in research-intensive firms: signaling and cash flow effects of patents and alliance activities. Strat. Mgmt. J., 30: 659–678. doi: 10.1002/smj.762
- Issue published online: 2 APR 2009
- Article first published online: 26 FEB 2009
- Manuscript Revised: 23 JAN 2009
- Manuscript Received: 19 SEP 2007
- innovation management;
- knowledge management;
- liquidity management;
- R&D strategies
The effective holding and management of liquid assets is critical to success in research-intensive industries. The primary output of invention is new knowledge. However, because of its ‘sticky’ characteristics, knowledge may not easily diffuse to external shareholders, leading to knowledge asymmetries between managers/employees and external suppliers of capital. Many valuable R&D projects may thus fail to attract external financing, limiting a firm's ability to invest in R&D. In this study, we examine how the cash flow and signaling properties of a firm's patents and certain aspects of its alliance strategy can attenuate such problems. Specifically, we suggest that a firm's R&D investments positively predict the level of its liquid asset holdings. This is due to the fact that invention-induced knowledge asymmetries increase the firm's cost of accessing external liquid capital. However, holding cash entails opportunity costs. In this regard, we also find that patent production and certain alliance activities provide important signaling mechanisms, which reduce knowledge asymmetries between the firm and capital markets, and consequently lower the firm's need to hold liquid assets. Empirical tests were conducted using a sample of 108 U.S-based biotechnology firms. Copyright © 2009 John Wiley & Sons, Ltd.