The Financial Assets of Non-Financial Firms

Abstract

This paper sheds new light on the financial assets of the largest non-financial firms. Instead of "cash balances," these assets are better understood as financial portfolios whose level and composition are actively managed by firms. Using novel hand-collected data, we construct a panel spanning the last twenty years and document the following facts. First, two-third of the $1T aggregate growth in 2007-2017 was driven by marketable securities: in recent years, bond portfolios are at least as large as cash-like instruments. In particular, we show a meteoric rise of corporate bond holdings in the aggregate portfolio, which have outgrown sovereign bond holdings to reach 25% of total corporate financial assets. Second, the 2017 repatriation tax reform was followed by a drastic reversal in levels and composition. One third of the previous decade's growth in financial assets left corporate balance sheets from 2017-2019 as firms liquidated bond portfolios to fund large share repurchases, while cash-like instruments remained stable. Finally, the liquidity crisis of early 2020 triggered a spike in cash-like instruments but not in riskier assets such as corporate bonds. Our evidence suggests that a significant share of firms' financial portfolios reflects tax incentives and reach for yield as opposed to financial constraints.

Keywords: Corporate cash, liquidity management, corporate bonds, repatriation tax

JEL Classification: G32, G35, G11, E440