Why Do U.S. Firms Hold so Much More Cash than They Used to?

Fisher College of Business Working Paper No. 2007-03-006

Charles A. Dice Center Working Paper No. 2006-17

50 Pages Posted: 4 Sep 2006 Last revised: 16 May 2008

Thomas W. Bates

Arizona State University - Department of Finance

Kathleen M. Kahle

University of Arizona - Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008

Abstract

The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase in cash holdings is that at the end of the sample period, the average firm can pay back all of its debt obligations with its cash holdings; in other words, the average firm has no leverage if leverage is measured as net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms, and it is much more pronounced for firms that do not pay dividends and for firms in industries whose cash flows became riskier. The average cash ratio increases over the sample period because firms change: their cash flows become riskier, they hold fewer inventories and accounts receivable, and they are increasingly R&D intensive. The precautionary motive for cash holdings plays an important role in explaining the increase in the average cash ratio; in contrast, in our empirical tests, agency considerations are not successful in explaining the increase.

JEL Classification: G30, G32, G35

Suggested Citation

Bates, Thomas W. and Kahle, Kathleen M. and Stulz, René M., Why Do U.S. Firms Hold so Much More Cash than They Used to? (April 2008). Fisher College of Business Working Paper No. 2007-03-006; Charles A. Dice Center Working Paper No. 2006-17. Available at SSRN: https://ssrn.com/abstract=927962 or http://dx.doi.org/10.2139/ssrn.927962

Thomas W. Bates

Arizona State University - Department of Finance ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Kathleen M. Kahle

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7489 (Phone)

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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