The sharp increase in Ru26D investment in recent decades has important but unexplored implications for corporate liquidity management. Because Ru26D has high adjustment costs and is financed with volatile sources, it is very expensive for firms to adjust the flow of Ru26D in response to transitory finance shocks. The main contribution of this paper is to directly examine whether firms use cash reserves to smooth their Ru26D expenditures. We estimate dynamic Ru26D models and find that firms most likely to face financing frictions rely extensively on cash holdings to smooth Ru26D. In particular, our estimates suggest that young firms used cash holdings to dampen the volatility in Ru26D by approximately 75% during the 1998–2002 boom and bust in equity issues. Firms less likely to face financing frictions appear to smooth Ru26D without the use of costly cash holdings. Our findings provide new insights into the value of liquidity and the financing of intangible investment, and suggest that Ru26D smoothing with cash reserves is now important for understanding cash management for a substantial fraction of publicly traded firms.
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