Table 6: U.S. long firm-level panel data 1960-2016: Firms adjust liquidity holdings and reduce R&D investment in <u>periods</u> of higher inflation

||||||||||1960-2008|
|---|---|---|---|---|---|---|---|---|---|
||R&D/|assets|Corp.|liquidity/a|ssets|R&D/|assets|inv/assets|R&D/assets|
|infation|||-.006<sup>_∗∗_</sup>|-.003<sup>_∗∗_</sup>|-.003<sup>_∗∗_</sup>|-.003<sup>_∗∗_</sup>|-.001<sup>_∗∗_</sup>|-.001<sup>_∗_</sup>|-.001<sup>_∗∗_</sup>|
||||(-5.97)|(-5.05)|(-3.75)|(-3.17)|(-3.87)|(-1.77)|(-4.86)|
|ln(Corporate liquidity)|.015<sup>_∗∗_</sup>|.001<sup>_∗∗_</sup>||||||||
||(6.39)|(2.84)||||||||
|ln(total assets)|-.027<sup>_∗∗_</sup>|-.017<sup>_∗∗_</sup>|-.018<sup>_∗∗_</sup>|-.015<sup>_∗∗_</sup>|-.003|-.016<sup>_∗∗_</sup>|-.016<sup>_∗∗_</sup>|-.012<sup>_∗∗_</sup>|-.015<sup>_∗∗_</sup>|
||(-4.31)|(-10.4)|(-11.6)|(-7.97)|(-1.22)|(-3.62)|(-9.20)|(-5.01)|(-9.74)|
|ln(retained earnings)|.004<sup>_∗_</sup>|.005<sup>_∗∗_</sup>|.008<sup>_∗∗_</sup>|.006<sup>_∗∗_</sup>|.005<sup>_∗∗_</sup>|.005<sup>_∗∗_</sup>|.005<sup>_∗∗_</sup>|.022<sup>_∗∗_</sup>|.004<sup>_∗∗_</sup>|
||(1.92)|(3.59)|(8.87)|(12.7)|(5.64)|(2.24)|(3.92)|(16.8)|(4.79)|
|ln(real GDP pc)|-.069<sup>_∗∗_</sup>|-.046<sup>_∗∗_</sup>|-.064<sup>_∗∗_</sup>|-.029<sup>_∗∗_</sup>|-.034<sup>_∗∗_</sup>|-.062<sup>_∗∗_</sup>|-.039<sup>_∗∗_</sup>|.143<sup>_∗∗_</sup>|-.040<sup>_∗∗_</sup>|
||(-4.02)|(-9.48)|(-5.50)|(-2.66)|(-2.66)|(-4.60)|(-9.46)|(10.9)|(-9.65)|
|Firm FE|No|Yes|No|Yes|Yes|No|Yes|Yes|Yes|
|Sector FE|Yes|No|Yes|No|No|Yes|No|No|No|
|Obs|62,104|62,104|202,285|202,285|61,691|68,500|68,500|234,610|59,893|

U.S. firm-level balance sheet panel data from Compustat, 1950-2016. Median inflation: 3.0% (average 2.6%). Heteroscedasticity robust s.e. clustered at year level; t-statistics in parenthesis. **,* significant at 5%, 10%.

investment in advanced but risky technologies (as measured by their R&D share) in periods of higher inflation (columns 6-7 of Table 6). The result is robust to variations in sample periods, for instance, when excluding the years after the global financial crisis (column 9). As before, we do not find an equivalent impact of inflation on firms’ total investment (column 8).<sup>24</sup> Finally, the data for U.S. firms also support the theoretical model’s sector-specific predictions in the generalized difference-in-difference estimation. Table 7 presents the results. We find that the negative impact of inflation on U.S. firms’ R&D investment is larger in more volatile sectors, in sectors with higher value added growth, and in more R&D intensive sectors.<sup>25</sup>

> 24The coefficient is marginally significant at the 10% level. However, we find a significant negative impact of inflation on the ratio of R&D over total investment (not reported in Table 6), consistent with the notion that inflation has a stronger impact on R&D than on non-R&D investment.

> 25We do not test the model prediction for sectors with higher asset tangibility since we expect that firms in the U.S. can also leverage their intangible assets (e.g., their brand name) as collateral. We thus predict a meaningful correlation between firms’ access to external finance and their ability to provide collateral exclusively through non-intangible assets only for firms in financially less developed countries. In fact, we find that, in the U.S., R&D intensive two-digit sectors have a lower asset tangibility.

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