Why Are U.S. Firms Holding So Much Cash? An Exploration of Cross-Sectional Variation

C urrently U.S. corporations have record-high cash holdings. Many argue that this phenomenon is related to the sluggish recovery of the economy: Firms holding more cash are investing less, and this prevents the economy from taking off. While referring to the cash holdings of Apple, the president of a business association stated “Why wasn’t Apple spending that money on expansion, new products and jobs? The answer is uncertainty—uncertainty over new taxes” (Brunell, 2011). The concern about cash holdings is also present in the academic literature, where the rise in cash holdings of firms has been associated with several factors, including many that started more than a decade ago. This article evaluates the role played by potential firm-level determinants cited in the academic literature by examining the cross section of publicly traded firms. In addition, it provides some evidence suggesting cash holdings may relate to aggregate uncertainty. In theory, transaction costs and precautionary motives are the main reasons firms hold cash. On the one hand, transaction costs associated with liquidating certain assets make cash preferable in response to movements in the market. Thus, holding cash can be important because Currently U.S. firms hold record amounts of cash. The authors explore cross-sectional variation in cash holdings of U.S. publicly traded firms to shed light on the reasons for this recent trend. First, they identify factors that correlate with cash holdings and then examine the evolution of these factors over the past decade. Several factors, including research and development expenditures and idiosyncratic uncertainty, are important in accounting for cross-sectional differences in cash holdings. However, these factors do not increase over time as cash holdings do; thus, it seems unlikely that they underlie the increase in cash holdings. Aggregate uncertainty, however, has recently reached record levels. This uncertainty, combined with the fact that (idiosyncratic) uncertainty correlates well with cash holdings in the cross section of firms, suggests aggregate uncertainty may be an important factor accounting for the recent trend in increased cash holdings. (JEL E43, E44, E62, G33)