Kathleen Kahle, a professor at the University of Georgia's business school, offers another reason: the growth of high-tech companies, which tend to hold lots of cash. Younger, riskier firms have more difficulty raising money when credit is tight, so they keep more cash on hand, she says. "At the same time, they have a lot of growth opportunities and want to make sure that they have the funds necessary to invest in good projects," she adds.
At the end of the second quarter, the 54 biggest information-technology firms held $280 billion — or 27% of their assets — in cash, according to the Journal's analysis, a higher percentage than any other industry group. Cash balances grew further in the third quarter for the 34 companies in that group that have reported results.
Consider Google. The search giant's cash and short-term investments rose 53% to $22 billion in the third quarter from a year earlier, accounting for 58% of its total assets.
The cash provides "operating and strategic flexibility," Google Chief Executive Eric Schmidt told analysts last month. "We're very happy to have it sit in our bank account and earn a modest interest rate."
Here is more. Apple is also hoarding cash. This report suggests that hospitals are hoarding cash, as does this report. Are these sectors weak in aggregate demand and expected aggregate demand? No, quite the contrary.
We are told that this cash hoarding is a sign of weak AD, yet firms which face high demand for their products hold especially high levels of cash. So is it a sign of both weak demand and strong demand? Maybe so, but then we need to be very careful with inference and we must consider whether extant hypotheses explain the cross-sectional variation in cash holdings and not just the aggregate. There are many puzzles in corporate finance, especially when it comes to explaining changes in the aggregates, and this is likely one of them.
These are only polls, but:
In a recent survey of company chief financial officers that Duke's Mr. Graham conducted with CFO Magazine, he found that companies expect capital spending to increase by 9% over the next year, compared with 1.5% when he asked the question in December. They expect employment to grow by 0.7%, compared with the 1.4% drop they expected six months ago.
When it comes to firms holding more cash, we still do not understand what is going on. Here is my previous post on the topic.
You realize of course that because of banking, companies don’t actually sit on their cash.
It is lent out to others?
It is not as if it is in a vault some where with Scrooge McDuck swimming in it.
U are assuming it is lent out by the banks…Doc.
How about elminiating the corporate income tax on dividends issued, which would make it a sane choice to distribute some of that cash to shareholders?
Strike Medicare, insert Medicaid.
Uncertain economic climate + unpredictable government + damaged balance sheets from burst bubble = better to build up cash reserves or pay down debt.
Balance sheet recessions are discussed in The Holy Grail: Lessons from Japan’s Great Recession by Koo.
Our hospital, and others in the area, saw a drop in business over the last couple of years that is starting to pick up now. We have also seen in increase in the number of uninsured. We built up cash to handle this expected slump. We will start capital spending again soon.
What is interesting is that the sectors you use–nonprofits and tech firms who engage in transfer pricing with foreign subs accumulating cash–is that 1) non-profits don’t go into the equity market, do need to accumulate cash for capital expansion, and the bond market has been unstable since March, so if you are not going to issue bonds, you will accumulate cash as a non-profit in the meantime; 2)some tech firms are accumulating cash for acquisitions (but will also go to the capital markets if they do acquire anyway), but a large number of them– Microsoft, Apple, HP, Oracle, Intel–do a hell of a lot of transfer pricing using their IP assets and asset valuation, leading to foreign sub cash accumulation which is ordinarily used for foreign investment. If there are few opportunities, cash will accumulate, and not be sent back to the US where some of it would be taxed as it should have been initially. Also, I question the premise that tech aggregate demand is increasing as the basis of the cash accumulation, and posit that there are fewer investment opportunities. This claim would require proof that tech aggegate demand has increased relative to other sectors, and you are unable to prove that.
Taking Google as an example, what are their holdings you are calling “cash”? Surely this is being held in short term bills of some kind, not a fricking checking account that is literally cash.
@BGP agreed
@bgp Agree with you about everything except the claim about uncertainty regarding capital gains as being responsible for cash hoarding. What is the logical argument? I could see an argument for large dividend distributions this year because of possibly going back to 2000.
Apple and Google seem like outliers to me, not good examples for a general trend, since they both have been doing exceptionally well throughout the recession. I might be missing something but don’t they have so much cash flowing in that they literally can’t spend or invest it fast enough? There is a limit to how fast you can grow in high-tech because there is very intense world-wide competition for the highly qualified engineers and other top talent you need to fuel said growth. Money by itself doesn’t buy you innovation.
@nelsonal, Agreed. And, don’t forget, if you know how to do transfer pricing, what would otherwise be taxable income in the US can be hidden from taxation in Ireland, Cayman Islands, and other places. MNCs, well represented at the Business Roundtable, have been resisting tightening up some of these loopholes that put domestic firms at a tax disadvantage to MNCs who are able to exploit the current loopholes.
I never knew much about this until I did a seminar on international distribution (my focus is antitrust and marketing) with some folks from Deloitte. Just amazing. Some of these tricks also explain why small tech firms, when they are acquired by MNCs, later have effective lower taxes as a sub just a few years later. Small domestic firms pay less taxes on what would be US sourced income than MNCs with good tax planners.
We live in uncertain times. Made more uncertain by the political class.
Uncertainty about financial regulation and government control makes for uncertainty about market liquidity. You hoard more cash.
Why did Jews in Nazi Germany hoard things? Fear and uncertainty about the future.
Plus the elections in November could see a huge shift in government policy, why not wait?
http://www.economist.com/economics/by-invitation
And Bill is shocked that smart firms find ways to increase after tax profits. That we live in a global market and that funds flow to places that let people keep a greater share of profits. Of course Bill probably wants a special tax on all investors who invest in global assets. Let’s start that economic suicide mission today.
“When it comes to firms holding more cash, we still do not understand what is going on.”
Why not ask Zizek?
Could you imagine what a jolt it would be to the economy if the federal government basically said, “you have six months to spend that cash or we’ll take it (through taxation) and spend it for you”?
They already have that. It’s called the Accumulated Earnings Tax.
Tech has lots of companies with scared monopolist syndrom. They want to have lots of money aviable to buy any competition that could emerge.
They do hold large amounts of cash. And what do they do with their cash? they invest it to generate greater returns.
Google and apple both have tons of cash on their balance sheet, and have asset management departments that increase the value of that cash with short term liquid investments such as commercial paper and doing basic carry trades with 3 year T-Bills. Such simple but effectively risk-managed investments create a good diversification model for tech companies who have a lot of cash, but aren’t paying out dividends.
As long their cash is being managed well, ( by means of setting benchmarks like S&P 500, creating a way to measure opportunity cost ), it is a good formula.
[ SAVE ANY JEROME KERVIELS THAT MIGHT COME ALONG]
http://www.businessweek.com/magazine/content/10_23/b4181033582670.htm
The phenomenon of companies retaining cash recurs throughout the spectrum of the market, it is not peculiar to any particular industry.
In a budding recovery promising robust future growth, companies would be using this cash to leverage even more financing to expand and take advantage. It is not the past experience of tight money which causes companies to sit on their profits – corporations are no more able to learn from experience than individuals – but rather the uncertainty of future federal restrictions, regulations, taxes, and mandates upon businesses. Obama has been quite willing to ignore legal authority and fire the CEO of GM, or pressure BP into a $20 billion extralegal fund controlled by a crony.
What company in their right mind would make a major investment in expansion today?
bjk,
Except 99% of the time you don’t realize who the competition will be until, they’re too large to purchase with cash. Microsoft knew the online delivered services would crush windows/office eventually, but they attacked the browser (which ended up being a pretty pyrric victory), because they ignored the lone company that will ultimately threaten that monopoly (but who could have imagined that when they were just a little search engine).
For this reason, most true monopoly saving mergers use shares not cash as the currency.
“For this reason, most true monopoly saving mergers use shares not cash.”
It’s not easy to tell which acquisitions were monopoly preserving. Oracle bot Sun with cash . . . to preserve the database monopoly from MySQL or to improve the Oracle product line? Probably both . . . Hard to tell.
Bill, according to the article you quote, the jobs for the most part stay in America but some taxes are avoided through a “loophole”. The government loses tax revenue but firms increase profits which leads to what? Growth and American jobs!
Absent the tax “loophole” what might happen? American companies are less profitable and leave the market to foreign firms. Then Bill wants to do what? Start trade wars?
Doing what Obama wants – complex tax codes designed to punish “evil” people just create a mess. Government by extortion.
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