Companies Cling to Cash

That’s the top headline in today’s WSJ, reporting on the continued growth in cash as a percentage of all corporate assets. The figure now stands at 7.4%.

One obvious reason that cash is increasing is that The Great Recession makes some investment projects look less profitable. But that begs two key questions.

First, the level of cash has been growing fairly consistently since the early 1980s, as the WSJ’s front page graph highlights. So while The Great Recession may be relevant to the recent spike, this spike appears to be just a swing along a longer term trend. There’s a nice paper in the Journal of Finance by Bates, Kahle and Stulz documenting the longer trend and identifying the causes. Their conclusion: company cash flows are riskier, and more of the businesses are R&D intensive with fewer assets in inventories and receivables, so that a company’s normal need to be cautious will lead it to hold a higher amount of cash.

Second, if a company is not going to invest the money, then shouldn’t it return it to shareholders? Perhaps not, if the company expects The Great Recession to be short-lived and investment opportunities to return.

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