Corporate Cash Holdings: Causes and Consequences

Abstract

The considerable growth in corporate cash holdings around the world has prompted scholarly interest. Consequently, there is now a large academic literature examining cash holdings and their impact on corporate outcomes and firm values. This article reviews and synthesizes the literature to offer insight into two primary motives to hold cash, namely a precautionary and an agency motive. It first presents a stylized model that explores the trade-off in holding cash between these two motives and then examines empirical evidence to determine how existing theories are supported by the data. In addition, we examine the effectiveness of a variety of corporate governance devices in curtailing cash holdings and also the extent to which these devices offer investors’ confidence that cash will not be wasted. Finally, after documenting that large cash holdings are an international phenomenon, we review cross-country studies and give particular attention to two key emerging economies: China and India.

Keywords: cash holdings, liquidity, corporate governance

JEL Classification: G30, G32