Why are U.S. firms holding more cash?

Somehow I missed this 2014 paper when it came out:

This paper explores the hypothesis that the rise in intangible capital is a fundamental driver of the secular trend in US corporate cash holdings over the last decades. Using a new measure, we show that intangible capital is the most important firm-level determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other determinants together. We then develop a new dynamic dynamic model of corporate cash holdings with two types of productive assets, tangible and intangible capital. Since only tangible capital can be pledged as collateral, a shift toward greater reliance on intangible capital shrinks the debt capacity of firms and leads them to optimally hold more cash in order to preserve financial flexibility.

That is from Antonio Falato, Dalida Kadyrzhanova, and Jae W. Sim.  Once again, it seems that intangible capital is one of the biggest underrated ideas in economics.



Somebody (namely the consumers) don't believe in AlexT's idea that "IP is bad" (simplifying). Last I checked, even EuroDisney is profitable. What we need--an underated idea--is not less IP but more and better IP. When is the last time a parent told their offspring to become an inventor rather than a gatekeeper (doctor, lawyer, middleman)? The only time would be to fill out a college admissions application to an Ivy League med, law or business school, akin to taking music lessons to seem more well rounded. But nobody in their right mind goes into either the invention business or music making to make money (Bill Gates--a college dropout, as was Mark Zuckerberg, note the significance of this, they both had to quit school to succeed--aside).

To remind themselves of why they sold America out for?! Sadopopulism is expensive & devalues human life. The cash is a pacifier to suppress the shame & scourge of hate culture in every aspect of human life today, business is not immune to this decay of human value. Emma Gonzales attempts to quantify human life to POTUS in light of her school being shot up (on YouTube).

I would venture to say that the problem is the relationship between “intangible capital” and State regulations. Banks would easily finance a company with the cash flows of Apple, if it did not have the 200bn or whatever it has in cash. But the requirement of the FED or other central banks in terms of reserves would make the cost too high.

Note to Ray: most of “intangible capital” is not IP, either patents or brands. It is organizational. I spent most of my working life in BCG, a management consulting firm that could raise tens of billions if listed, compared to equity of at most a few hundreds millions. It’s not the brand, it is the paistacking work during the last 50 years of building an organization of truly remarkable individuals, with a strong shared culture and a set of aligned incentives. I reckon partners spend maybe 20% of their time resolving people issues in the office, and I don’t mean the usual staffing, training, recruiting or performance evaluations. Keeping together a bunch of 10.000 mostly primadonnad is an exhausting job. In other cases, the intangible value might come from a much smaller but extremely lucky combination, like Jobs and Wozniak. In either case, it is not easily replicable.

I also believe that the web is decreasing the importance of this type of organizational capital. Drastically reducing the transactions costs, it makes the value of existing networks less relevant. They can be built easier than in the past, although of course it is not simply a work of putting together competencies in a cv. Anyway, more assignments and projects can be done by temporary ad-hoc teams, and also finding potential people is much easier than in the past. At my times BCG recruited almost exclusively from 5 or 6 MBA programs, now from all type of backgrounds. At the extremes, the value of these organizational arrangements will revert to consumers and single producers, eliminating the need and the capture of value by intermediaries like the “firms”.

Thanks for that observation. Given that IP laws are weak in the USA, not to mention worldwide, it could well be that intangibles are organizational capital more so than patents, trademarks and copyrights.

Bonus trivia: I lost a bunch of money on a stock that claimed to be an 'expert network' of the kind Massimo describes. It was a NYSE company as I recall, too lazy to look it up, and it went bust before 2008.

"Since only tangible capital can be pledged as collateral, a shift toward greater reliance on intangible capital shrinks the debt capacity of firms and leads them to optimally hold more cash in order to preserve financial flexibility." The authors' observation, that firms are holding more cash, is undeniable, but their explanation seems to be taken from thin air. "Financial flexibility"? During the Great Recession almost all firms, whether they relied on tangible assets or intangible assets, weren't borrowing to invest in productive capital notwithstanding near zero interest rates. Maybe firms that rely on intangible assets don't need to invest as much in additional productive capital; or maybe once they have discovered the next big thing (the intangible asset) they are at a loss for discovering the next, next big thing; or maybe they are more profitable as compared to firms that rely on tangible assets; or maybe they rely less on labor and hence don't need to invest as much in tangible assets to make their employees more productive; or maybe they have greater flexibility in avoiding taxation by shifting the intangible assets to tax havens, something not so easily accomplished by firms that rely on tangible assets.

If you look at many of the corporate holders of cash/ce, they both have a lot of intangible capital and are capable of massive borrowing. Much of the cash ($2.5 TRILLION+) stays overseas (instead of being returned to shareholders) largely for tax purposes.

It would be interesting to look at historical data of medium and small corporations with mostly domestic sources of revenue.

You are exaggerating the amount of “cash” trapped overseas by the prevailing tax system over that period; however, absolutely right that it helps explain the overall amount of cash held, yet not one word from the authors about that. Very strange. Also, I failed to notice any mention of the overall level of debt over that period. Both cash and debt rose significantly. Most companies are not constrained by the lack of tangible assets to use as security—the issuance of corporate debt securities does not depend on it. https://fred.stlouisfed.org/series/NCBDBIA027N

The premise of this “study” is deeply flawed.

The reason they could not bring the money back to pay workers to make more products to export is the corporate tax in the US taxes labor costs. In the rest of the world, they only tax labor costs for things consumers buy, but exempt from tax the labor costs of exports. That is how China and Europe cheat, and the reason to impose the Border Adjustment Tax to bring the tax burden of imports up to the US corporate tax on labor costs!

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Investors look at net income, its growth potential, etc. more than leverage ratios.

I think the utility of intangible assets (most are not reported on the GAAP and bank regulatory accounting records/statements) are reflected in M&A purchase premiums and in higher net incomes. Higher revenues and net incomes show up in higher stock valuations and greater capacity to repay/service debt.

Unsecured debt isn't all bad. Uncollateralized/unsecured debt, in default, has access to all the corporation's assets. Collateralized/secured debt in default has prior (to unsecured) access to liquidating the pledged collateral.

Accounting finance people (me) differently define terms such as capital, assets, etc.

Operating revenues are highly important in protecting solvency (absorbing operating losses) and securing the pecuniary interests of creditors, shareholders and the public.

Professors need to publish or perish.

Here's the summary of a new working paper that considers the effect of income inequality on issues such as why companies/individuals are holding more cash: http://equitablegrowth.org/research-analysis/income-inequality-and-aggregate-demand-in-the-united-states/ The summary/working paper doesn't offer the definitive answers but raises questions that beg for more research. What I find most interesting is that high levels of inequality may turn conventional wisdom on its head, up may well be down. Which means people like John Cochrane (up is down) may well have much more insight about today's economy than his closed minded detractors are are willing even to consider. Not that Cochrane is willing to attribute his insight to inequality, but so what if he's right about the effect? There's no disgrace in being right for the wrong reason.

So, hold cash to have a good debt rating that yields in lower interest payments?

"Since only tangible capital can be pledged as collateral, a shift toward greater reliance on intangible capital shrinks the debt capacity of firms and leads them to optimally hold more cash in order to preserve financial flexibility."

Bogus, bogus, bogus!

A taxi medallion is an intangible asset that has frequently been used as collateral for debt. It is not a productive asset.

But debt and shareholder equity are only marginally different in that debt has priority over assets, tangible and intangible, over shareholder equity.

Ie, shareholders are the last to benefit from the sale of the trademark, an unproductive intangible asset, like Craftsman, Sears, GE-Maytag-RCA as appliance brands, after debtors collect from the sale of these intangible assets.

Debt is frequently secured in M&A by trademarks, goodwill, customer bases, which are all intangible assets. In many cases, these deals are clearly using debt to buy a firm and then sell off the tangible assets, like factories, at prices far lower than the debt.

E.g., RCA, GE, Magnavox were bought with all the tangible assets, the factories, quickly liquidated. As well as much of the sales and marketing organization, with the value being the established sales channels, shelf space, retailer intangible sales and marketing strategy of selling multiple brand choice as an intangible customer value.

And debt comes in many forms, most debt these days being unsecured debt. Credit card debt is unsecured. Private equity debt is unconstrained by any requirement to use tangible assets.

And since Reagan and free lunch economics, home mortgage debt is independent of tangible asset value/cost. If mortgage debt were constrained by tangible value, then the allowed debt for mortgages in 2003-6 woild have been at least 20% lower in most areas, especially Ariizona, Nevada, etc. No rational basis existed for new or recent housing to sell for higher prices than market price 3 years earlier, for the period 2000 to 2006. The debt written for housing during this period was debt secured by intangible asset value.

It seems to me that there's a FinTech market opportunity to use intangible capital as collateral.

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