Sunday, December 22, 2013

Why are US firms holding so much cash?

A question for the last few years has been: why are U.S. firms holding so much cash?  Cash holdings as a percent of net assets has increased by 22% over the last few years (around a trillion dollars).  Note: this is a question about why firms are holding so much wealth in liquid form!  Most explanations hover around the impact of the financial crisis, the Great Recession, and policy uncertainty.  While never satisfied (anything that smacks too heartily of politics is wrong more often than not), Corrections lacked good micro evidence.

Of course, Compustat has a large sample of firms in its dataset with detailed information on financial holdings.  Examining it, we find  aggregate cash holdings of firms has been dramatically increasing since around 1996 (increasing to 500% of original value).  From the St. Louis Fed's Juan Sanchez and Emircan Yurdagul, aggregate cash and equivalents of U.S. Firms (from Compustat) (click to enlarge):
Aggregate Cash and Equivalents of U.S. Firms
Or, in percentage terms of net assets (the real question, as it is more reasonable to stay constant over time) (click to enlarge):
Ratio of Cash to Net Assets

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