Not Dead Yet: The Changing Role of Cash on Corporate Balance Sheets

9 Pages Posted: 30 Jun 2013

Date Written: January 16, 2013

Abstract

Public alarms have sounded over the rising holdings of cash on Canadian businesses’ balance sheets. Critics have alleged the hoards reflect a market failure or collective business failure to invest productively in new machinery and equipment.

A closer look at the situation suggests more to the story. While corporate cash as a share of assets has risen in the past decade, the share of other, non-income earning current asset components, such as inventories and accounts receivable, has significantly fallen. Businesses appear to have been responding to long-term trends in economic conditions, including enhanced business processes that have shrunk inventories, by better managing their balance sheets.

Evidence therefore suggests that businesses have been shoring up financial assets to match liabilities, in part for precautionary reasons, that there is no economic problem or market failure to be addressed and, accordingly, no policy action indicated in response.

Keywords: Economic growth and innovation, business, economic problem, market failure

JEL Classification: D22, G32

Suggested Citation

Poschmann, Finn, Not Dead Yet: The Changing Role of Cash on Corporate Balance Sheets (January 16, 2013). C.D. Howe Institute e-brief 143. Available at SSRN: https://ssrn.com/abstract=2285766

Finn Poschmann (Contact Author)

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8
Canada
416-865-1904 (Phone)
416-865-1866 (Fax)

HOME PAGE: http://www.cdhowe.org

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