Via MR via Ezra Klein Barry Ritholtz points out that the increase in corporate cash is not some new thing.
“1) The average cash-to-assets ratio for corporations more than doubled from 1980 to 2004. The increase was from 10.5% to 24% over that 24 year period. That was the findings of a 2006 study by professors Thomas W. Bates and Kathleen M. Kahle (University of Arizona) and René M. Stulz (Ohio State). When looking for an explanation, the professors found that the biggest was an increase in risk.
Indeed, the phenomena of corporate cash piling up has been going on for a long long time. You can date it back to the beginning of the great bull market in 1982 to 86, went sideways til the end of the 1990 recession. It has been straight up since then, peaking with the Real Estate market in 2006. The financial crisis caused a major drop in the amount of accumulated cash, but it has since resumed its upwards climb.
2) The total cash numbers numbers are somewhat skewed by a handful of companies with a massive cash hoard. Exxon Mobil, GE, Microsoft, Apple, Google, Cisco, Johnson & Johnson, Verizon, Altria, EMC, Disney, Oracle, etc.”
Tyler Cowen believes that because this issue has been around for a while, “there is less to this issue than meets the eye.” Whether or not corporate cash piling up matters depends on the reasons behind the pile up, of which there are a few.
1. Corporate earnings overseas are not brought back due to tax implications.
2. Corporations are hedging against an increased perception of risk.
3. Lack of attractive investment opportunities.
4. The average new successful company is successful because it knows how to grow, and these types of companies are more likely to hold onto cash than companies run by CEOs who are focused on maximizing shareholder value via more direct means. Over time, the largest companies will be more likely to be the cash hoarders who don’t pay dividends.
5. There have been more very successful IPOs recently and recent IPOs are more likely to hoard cash.
6. The success of companies in #4 and #5 reduces the pressure on other CEOs to keep their cash levels relatively low.
7. Tangible assets have declined in value relative to non-tangible assets, so some companies hold more cash to keep up a safety cushion of real assets.
8. The total amount of cash is increasing in tandem with the total amount of assets.
To address #1, congress passed the American Jobs Creation Act, which reduced the US tax rate on repatriated earnings of foreign subsidiaries from 35% to 5.25% in 2004 and 2005, encouraged corporations to repatriate foreign earnings and invest (many decided to increase their share buy backs) but since that ended it wouldn’t be surprising if the foreign earnings started to pile up.
I decided to go to the flow of funds and look at the data myself, normalizing it for total assets. It turns out that cash and near cash assets, the pink line, hasn’t deviated from its long run mean. The main trend is the decline in tangible assets and the rise of miscellaneous assets.
Source: Fed Flow of Funds. Note: These are only domestic assets, leaving out foreign earnings held overseas. Near cash assets include deposits, currency, money market, security RPs, commercial paper, treasuries, Agency & GSE back securities and municipals.
It is likely that miscellaneous assets include cash-like assets, in order to square these results with those of Bates, Kahle and Stulz in their 2009 paper “Why Do U.S. Firms Hold So Much More Cash than They Used To?” mentioned by Ritholtz in his post. This study, unlike the Flow of Funds data in the chart below, also includes cash held at foreign subsidiaries.
Looking at the data in the paper more closely, it looks as if numbers #2, #4 and #7 are very important. All of these are related to high tech firms replacing old school manufacturing firms which paid more dividends, had relatively stable cash flows and required more tangible assets.
Although the increased hoarding of cash may be a common trend, there is more to this issue than meets the eye.