We demonstrate theoretically and empirically that strategic considerations are important in shaping cash policies of innovative firms. In our model, firms decide whether to invest in innovation while facing uncertainty regarding the structure of ensuing product markets. Cash holdings reduce innovative firms ’ dependence on external financing and, therefore, serve as a commitment device for future investment. We show that firms ’ equilibrium cash holdings are related to expected intensity of competition in future product markets and that this relation is affected by the degree of financial constraints that firms face. We test our model using a sample of firms that are direct competitors in innovation. Consistent with the strategic motive for hoarding cash, we show that firms ’ cash holdings are negatively affected by their rivals ’ cash holding choices, more so when competition is expected to be intense. In addition, we examine two instances of exogenous shocks to firms ’ costs of external financing and show that financial constrains influence the relation between firms ’ cash holdings and expected

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