Political tie hot potato: The contingent effect of China's anti-corruption policy on cash and innovation

• Companies in the emerging market context intensify their innovation efforts when they have enough cash on hand. • Politically connected firms are more likely to invest heavily in R&D when they have cash holdings. • When a nation-wide anti-corruption campaign is implemented, politically connected firms with cash holdings begin to lower their R&D investment. • Anti-corruption policies strongly motivate politically connected firms to turn their investments into actual innovation output. In this study, we combine the resource-based view (RBV) with institutional theory to examine how a firm's cash holding affects its innovation investments and outcomes and explore the contingent roles of political ties and the national anti-corruption policy. Using 18,125 firm-year observations of Chinese firms from 2007 to 2016, we reveal a three-way interactive effect of cash holding, political ties, and the anti-corruption policy on innovation. Before the policy is implemented, cash holding has the greatest positive effect on R&D investment for politically connected firms, and after the implementation this positive effect for these firms is strongest for R&D outcomes. We propose that the logic of resource utilization efficiency implied by the anti-corruption policy strongly motivates politically connected firms to convert their R&D investment into actual output. The theoretical and practical implications are discussed.