Working Paper: NBER ID: w23767
Authors: John R. Graham; Mark T. Leary
Abstract: We put the recent increase in corporate cash in historic perspective by studying nearly 100 years of average and aggregate cash holdings. Corporate cash more than doubled in the first 25 years of our sample before returning to 1920 levels by 1970. Since then, average and aggregate patterns diverge. To understand these patterns, we examine both time-series and cross-sectional variation in cash policies and draw several conclusions. First, the increase in average cash ratios since 1980 is driven entirely by a shift in the cash policies of new entrants, while within-firm changes have been negative or flat since WW II. Second, the cross-sectional relations documented on modern data are remarkably stable back to the 1920s. Third, despite the stability of these relations, firm characteristics explain little of the time series variation in aggregate cash holdings over the century. Macroeconomic conditions, corporate profitability and investment, and (since 2000) repatriation tax incentives help fill this gap.
Keywords: corporate cash; cash holdings; financial policies; macroeconomic conditions
JEL Codes: E41; G32; H32; N0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in average cash ratios since 1980 (G32) | driven by new entrants into the market (L19) |
| new entrants into the market (M13) | small, growth-oriented firms (L25) |
| macroeconomic conditions (E66) | aggregate cash holdings (G59) |
| corporate profitability, investment opportunities, tax incentives for cash repatriation (F23) | aggregate cash holdings (G59) |
| contemporaneous cash flows and investment expenditures (G31) | changes in cash holdings (E41) |
| firm characteristics (L20) | time series variation in aggregate cash holdings (E41) |