More evidence on “hoarding cash”

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.


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