This project strive to provid a comprehensive references for the phenomenon documented by Bates et al. (2009). They document that the average cash-to-assets ratio for the US industrial firms more than doubled between 1980 to 2006. The figure below illustrates that this surge in cash has continued in recent years. This phenomenon is known as ‘corporate savings glut’ in literature and popular press (Falato et al., 2022).
"Understanding this phenomenon, many argue, may help us tease out the reasons for the slow recovery from the Great Recession" (Sánchez and Yurdagul, 2013)
To describe the observed trend in the time series of US firms' cash holdings, authors introduce different factors from different perspectives. In this Google Sheet, we introduce these factors along with their relevant information including the rationale behind each factor.
Although describing the surge in cash has been the subject of many studies, a major gap remains in the literature regarding the relative importance of the potential drivers. In the following paper, we study for the first time the relative importance of a selective set of factors which are proposed to descibe the phenomenon. this paper has been accepted to be presented at: Economics and Financial Technology Conference, University of Edinburgh, UK, Financial Management Association (FMA) European Conference, Aalborg University, Denmark, and Finance and Business Analytics Conference, Lefkada, Greece.
Movaghari, Hadi, Tsoukas, Serafeim and Vagenas-Nanos, Evangelos (2024). Corporate Cash Policy and Double Machine Learning. Internationl Journal of Finance and Economics.
There are several reasons why cash holdings have risen in the US capital market since the 1980s. Here are a few possible explanations:
Increasing Uncertainty: The economy and financial markets have become more complex and uncertain since the 1980s, with rapid technological change, globalization, and deregulation. This has made it more difficult for companies to predict future cash flows and investment opportunities, leading to a preference for holding more cash as a precautionary measure.
Financial Distress: The 1980s and 1990s saw a wave of corporate bankruptcies and financial crises, including the savings and loan crisis, the junk bond market collapse, and the dot-com bubble. Companies may have learned from these experiences and increased their cash holdings as a buffer against financial distress.
Tax Policy: Changes in tax policy may have also played a role in the rise of cash holdings. For example, the Tax Reform Act of 1986 eliminated many tax loopholes and lowered the corporate tax rate, making it more attractive for companies to retain earnings rather than distribute them to shareholders as dividends.
Shareholder Activism: Another factor that may have contributed to the rise of cash holdings is the growth of shareholder activism. Activist investors often pressure companies to return more cash to shareholders in the form of dividends or share buybacks. To maintain flexibility and avoid being forced into these actions, companies may choose to hold more cash.
Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why do US firms hold so much more cash than they used to?. The journal of finance, 64(5), 1985-2021.
Falato, A., Kadyrzhanova, D., Sim, J., & Steri, R. (2022). Rising intangible capital, shrinking debt capacity, and the US corporate savings glut. The Journal of Finance, 77(5), 2799-2852.
Sánchez, J. M., & Yurdagul, E. (2013). Why are corporations holding so much cash?. The Regional Economist, 21(1), 4-8.
The corporate savings glut; Saving by companies." The Economist, vol. 376, no. 8434, 9 July 2005, p. 62 (US).