Research Discussion Paper – RDP 2016-03 Why Do Companies Hold Cash? Abstract
Over the past quarter century, Australian companies have been increasingly holding assets in the form of currency and deposits, or ‘cash’, rather than investing in other productive assets. This reflects a global trend and raises the question of whether Australian companies now hold ‘too much’ cash.
Despite Australian non-financial companies holding high levels of cash by international standards, we find little evidence that the increase has been ‘excessive’. Instead, we find that the rise in corporate cash is mostly due to changes over time in observable company characteristics, including an apparent increase in the growth opportunities of publicly listed companies (as proxied by Tobin's Q). We also find some evidence of ‘cohort effects’ as Australian companies are more likely to be ‘born’, or come into existence, today in industries that have relatively high levels of cash, such as information technology, pharmaceuticals and biotechnology.
We also find evidence that public companies hold more cash than private companies, on average. This is consistent with agency conflicts between owners and managers playing a role in corporate decisions to hold cash.
Overall, we find that, in the face of financing frictions, some Australian companies have speculative and precautionary motives for holding cash. It follows that high levels of corporate cash do not necessarily indicate a weak outlook for corporate investment but might, in some cases, actually imply more investment opportunities.