We compartmentalize R&D into R (research) and D (development), and investigate their association with important corporate financing decisions. We show that R is more positively associated with cash holdings than D, and that only R is sensitive to cash flows. These results are consistent with higher uncertainty and information asymmetry of R imposing more severe financial constraints relative to D. Supporting the financial constraint explanation, higher cash flows sensitivity of R is prominent among financially constrained firms. Consistent with D bearing product market risk, D is associated with higher cash holdings when product market competition is severe, but we do not find the same result for R. Lastly, we find negative association between leverage and R but not D.
Keywords: R&D, cash holdings, investment-cash flow sensitivity, capital structure, product market competition
JEL classification: G30, G32
