Working Paper: NBER ID: w12534
Authors: Thomas W. Bates; Kathleen M. Kahle; Rene M. Stulz
Abstract: The average cash to assets ratio for U.S. industrial firms increases by 129% from 1980 to 2004. Because of this increase in the average cash ratio, American firms at the end of the sample period can pay back their debt obligations with their cash holdings, so that the average firm has no leverage when leverage is measured by 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. It is concentrated among firms that do not pay dividends. The average cash ratio increases over the sample period because the cash flow of American firms has become riskier, these firms hold fewer inventories and accounts receivable, and the typical firm spends more on R&D. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio.
Keywords: No keywords provided
JEL Codes: G30; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average cash ratio (G32) | increased riskiness of cash flows (G32) |
| decrease in inventories and accounts receivable (M41) | increase in cash holdings (G32) |
| capital expenditures (G31) | cash holdings (E41) |
| increase in cash ratios (G32) | heightened cash flow risk (F65) |
| increase in cash holdings (G32) | changes in inventory and capital expenditure practices (G31) |
| average cash to assets ratio increased (G32) | significant rise in cash holdings (G39) |
| increase in cash ratios (G32) | firms with no dividends have more pronounced increase (G35) |
| average net debt ratio has decreased sharply (G32) | firms could pay off debts with cash reserves (G32) |