Via Ezra Klein, Barry Ritholz reports:
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.
There is more at the link. As I've been saying, there is less to this issue than meets the eye.
Will these companies get pummeled if inflation jumps? Seems that would be the risk they currently face. The data starts in 1980 meaning there really hasn’t been a major inflationary period during the era of stockpiling cash.
Tyler, I hope you make clear your view about the definition of money. We can continue forever the discussion but at least one should try to be consistent and robust in applying a particular definition.
In his latest post your colleague B. Caplan writes
“The quantity theory of money is extremely intuitively plausible, as Hume’s famous thought experiment shows.”
Yes, that made sense at the time Hume wrote it. It doesn’t make sense today because our payment systems are quite different and there are all sorts of assets that can be used as partial sustitutes as reserve of value. In addition, Caplan appears to ignore that there is no room for “money” as a means of payments in macro theory. Thus, I don’t know what he’s talking about the relation between “money” and “nominal income”.
“the professors found that the biggest was an increase in risk.”
So, we can conclude that Reaganomics has increased business risks??
If risks are higher, are the rewards also higher overall? Or are rewards higher for some, and much less for the majority?
I find the stories of increased investment and innovation in one of the highest risk industries indicate that at least some people are finding productive places to invest their money, even when risk of loss is very high. The cocaine importers are developing increasingly sophisticated cargo submarines, and the risks are high in this business – 50 have been captured and confiscated by drug agents.
Imagine if these sub designers were being paid by the oil industry to build cargo subs that would capture the leaking oil a mile down and then delivered it to the US without detection!
Long term decline in assets as just in time inventory comes to dominate many fields
Lower interest rates make cash management less crucial.
How do large firms carry derivatives on their books?
Supplier credit and the role of large R&D firms to finance projects at startups. I would assume that a large R&D firm can leverage industry knowledge to find better investment opportunities then banks (or other traditional ways). How large is the speculative demand for money for the larger firms?
The ratio has taken a slight spike under Obama. Why?
If you have a choice between holding lots of cash and buying back your own stock from the market for the benefit of shareholders – and you decide to hold lots of cash – then are you not projecting a firm belief that your firm’s stock price is adequately priced / unlikely to move upward with an expected rate of return greater than … cash?
On the other hand, if you saw trouble on the horizon, and thought stock prices, including your own company’s, were too high and set to drop, you would want to hold lots of cash on the sidelines, waiting for a buying opportunity on the drop.
Double Dip?
“the phenomena of corporate cash ”
C’mon. It’s “phenomenon”. Two or more of them are “phenomena”.
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