Why Companies are Sitting on Cash

A recent article in Harvard Business Review shares insights on why U.S. companies are sitting on approximately $4 trillion in cash compared to just $2.7 trillion a decade ago and $1.6 trillion in 2000.

The article reports the findings of a Harvard study that explored “how much of the enormous increase in corporate cash reserves is driven by precautionary needs.” The study used data from the Bureau of Economic Analysis to track corporate cash and found that the majority of cash is held within “a limited number of multinational corporations (MNCs) and that 85% of the rise in cash held by MNCs is held in their foreign subsidiaries.”

The study also found that uncertainty is not the primary reason for the increased cash holdings: “Our estimates suggest that 79% of the increase in foreign cash is due to a combination of declining international tax rates and active tax minimization behavior by U.S. corporations.”

The article notes that while cash reserves are impacted by risk and uncertainty, “the impact of tax and precautionary motivations on cash are vastly different in magnitude. We find that domestic cash, which isn’t driven by tax concerns, increases only slightly faster than GDP. For comparison, MNC’s foreign cash holdings increase almost three times as quickly during the same period.”

The study findings provide valuable information for executives, the article concludes: “Doing due diligence on peers’ effective tax rate and use of tax havens  can provide a useful lens for understanding how much a peer’s cash is changing due to concerns about future financing or investment opportunities,” which, in turn, can lead to more efficient liquidity management.