Reasons for the Increase in the Overall Corporate Cash Reserve

Since the horrible cash crisis of 2008, business are holding onto a significant amount of more cash. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, in 1980 firms only held 12 percent of assets in cash. But this number almost doubled by 2011, amounting to approximately 22 percent of assets being held in the corporate cash reserve.

Since the horrible cash crisis of 2008, business are holding onto a significant amount of more cash. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, in 1980 firms only held 12 percent of assets in cash. But this number almost doubled by 2011, amounting to approximately 22 percent of assets being held in the corporate cash reserve. The rise in the corporate cash reserve has caused significant speculation toward the reason or reasons for this significant spike. The following information presents potential causes for why corporations are holding onto more cash than ever before in history.

There are factual macroeconomic factors that undoubtedly lead to the reasons behind the rise in the corporate cash reserve. One potential reason corporations have increased their corporate cash reserve is because capacity utilization is extremely low. According to Forbes, during 2008 through 2009, U.S. industrial utilization plummeted from 80% to a staggering 67%, which represented the lowest it has ever been. Yet, this rate was even more dramatic for certain sectors such as the automotive sector, which suffered a 35% decline. The other reason is because of the extremely low inflation rate, which significantly lowers the opportunity cost of holding cash. For example, instead of purchasing inventory, corporations are more likely to hold the cash because the value of the inventory is much more likely to stay in tune with inflation.

In addition to stockpiling cash, several companies are doing so outside of the United States. The top five holders of cash outside of the United States are Google, Microsoft, Apple, Cisco, and Pfizer, which account for at total of $347 billion. Factors for the rising international corporate cash reserve are deduced to the slow rate of domestic growth, the strength of international markets, and the substantial tax cost of repatriating the money. Instead of paying the gargantuan tax bill, several companies are simply allowing the money to stay overseas. According to Moody's, "Based on better overseas growth prospects and domestic cash consumption represented by dividends, share buybacks, and the majority of acquisitions we expect overseas cash balances will continue to grow unless tax laws encourage U.S. companies to repatriate money,".

While several causes may lend to the increase in the corporate cash reserve, undoubtedly the uncertainty of the future is the primary culprit. The Harvard Law study, "The Effect of Manager's Professional Experience on Corporate Holdings" highlights the notion that the previous experiences of managers has caused them to behave in a much more cash conservative manner. Simply put, since many CEOs have experienced major financial difficulties previously in their career, they are much more likely to stockpile loads of cash. Based on the study, "We find that CEOs who were previously employed at a firm that experienced financial difficulties have a cash-to-asset ratio that is 3.1 to 4.4 percentage points higher compared to those firms whose CEOs did not experience financial difficulties." This trend doesn't seem to be curtailing anytime soon due to the fact that firms "...may choose the CEO because she has experience running financially troubled firms..."

Overall, corporations are holding onto more cash because of several variables. While experience is the best teacher, several CEOs can easily recall when funds were not available for their short term corporate projects. During times of financial crisis banks practically shut their lending doors, which meant forced several businesses to close their own. The only solution to sustain business is by using on-hand cash, which has always been king in the business world.

About the Author

Neil Jesani

With the goal of establishing BeamaLife as America’s premier alternative investment strategy firm utilizing life insurance based asset class, Neil Jesani has sharpened BeamaLife’s strategic focus and concentrated on “finding the exceptional value in investment grade life insurance based assets for corporations, banks and high-net-worth individuals. Jesani believes in high-tech, high-touch approach by investing in latest technology and intelligent human capital.

Jesani began his career as an authorized financial consultant with Eagle Star International in Dubai after earning his MBA in finance in Gujarat, India. He moved to Citibank Dubai as a private banker before immigrating to the United States. In the United States, he worked with Cowan Financial Group as the Managing Director. Jesani has earned numerous high performance promotions and awards throughout his career. He has built, developed and managed a team of successful financial professionals. He is also a Certified Financial Planner and recognized by the Consumers’ Research Council of America as one of “America’s Top Financial Planners”. Jesani regularly contributes articles and financial advice to the top publications/media.

Jesani continues to aim high, striving to make a difference in the lives of fellow Americans by creating solid risk management and wealth creation strategies for individuals and corporations alike. Jesani has been married for over 17 years, has two children, and unreservedly considers his family as his greatest achievement.

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