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Title: Stockpiling Liquidity to Acquire Innovation

Abstract: Cash utilization in US merger and acquisition (M&A) transactions has increased over 50% since the early 1990s amidst a secular, global M&A boom. How does this cash-use relate to a firm's cash stockpiles, and what are the aggregate implications for firm innovative efforts, growth, and monetary policy? To answer these questions, we pose a general equilibrium theory of R&D-intensive firm cash stockpiling and use in M&A transactions. M&A cash bids can close faster than those externally financed, hence reducing the hazard of competing offers and external risks of trade breakdown. A higher common-value component in M&A arising from transferable productivity of firms’ intangible assets spurs increased M&A competition and serial acquirer cash-stockpiles. Despite sellers receiving a cash-premium as compensation, cash-use biases M&A rents and growth incentives towards serial acquirers. Higher nominal interest rates differentially impact internal and external growth incentives across firms, re-shaping the firm-size and productivity distribution. Calibrated to the US economy, we find that increasing transferable productivity differences and M&A competition, not interest rates, can account for the majority of aggregate firm cash stockpiles since 1990.