NC State Economist Mike Walden: Why Have Companies Been Holding Cash?

Supporters of the new federal tax plan say it will encourage businesses to invest more by reducing their taxes and encouraging them to bring funds they have overseas back to the U.S.  But critics are doubtful because they say companies have lots of cash already in the country for investing.  What’s been happening with companies’ cash management?

  1. Excellent questions
  2. First, an historical view is always useful
  3. Find that companies – mainly corporations – cash holdings relative to their assets is not at an all-time high – that occurred in the 40s and 50s
  4. But ratio has been rising since 2000
  5. Research attributes several reasons – more tech and health care firms which traditionally held more cash, modest investment spending, and – the cost of bringing back cash from overseas
  6. So if tax plan improves investment opportunities and lowers cost of returning foreign cash, may see domestic cash holdings drop