As cash holdings at publicly traded, non-financial, non-utility corporations are now at $1.6 trillion -- and a record of nearly $5 trillion for all publicly traded companies -- one must wonder why. After all, if they invest at least some of that cash -- roughly 10% of GDP for non-financial, non-utility corporations -- the economy might regain a trajectory of higher growth. And corporations would likely hire more in the process. Is it because of uncertainty in Washington or the economy more generally? Or a higher tax rate for repatriated cash back to the U.S. from abroad that favors holding cash in foreign units? Maybe a concern about a lack of financing, now or in the future? Or is it a combination of these factors?
Researchers from the St. Louis Fed analyzed this issue extensively and considered the fact that the corporate income tax rate in the U.S. is higher than in some of the foreign markets where U.S. multinationals do business. When a U.S. multinational earns income overseas, it pays corporate income taxes in that country, but pays U.S. income taxes on the difference between U.S. taxes and foreign taxes only if those funds are repatriated back to the U.S. Thus, firms may have an incentive for not repatriating those foreign earnings.
But analysis of corporate behavior, not just for U.S. companies but other multinationals domiciled in other countries as well, suggests taxation is a factor, though maybe not the only one or even the most important one. Nonetheless, the researchers note that fiscal policy may be playing an undesirable role here, keeping U.S. companies from repatriating cash and investing those funds here.
Then there might be the issue that a lack of financing following the financial crisis might be at work. But cash holdings have been increasing for years. From 1980 to 1995, corporate cash holdings for all corporations increased at an average annual 7% per year. Then, starting in the mid-1990s, cash holdings grew at an annual rate of 10% to 2010.
Looking in more detail during this latter period and focusing on just non-financial, non-utility firms, cash holdings grew by a very high 19% per annum from 2002 to 2004, plateaued until 2008, and then grew again at a high rate, 11% per year on average, to reach a record $1.6 trillion.
Thus, because cash holding growth predated the financial crisis, the growth in cash holdings might not be because of the financial crisis. (Of course, the reasons for high cash holdings may change over time.) And an analysis of cash holdings by company size show smaller companies, which may have more liquidity constraints than larger companies do, haven't increased their cash holdings by a greater amount than larger companies. That suggests concerns about financing, reflecting a precautionary motive, might not be the biggest factor.
Rather than company size as a correlated factor, however, the researchers found that industry sector had a more noticeable pattern. More to the point, those companies in a handful of sectors that typically have large R&D investments, such as technology and pharmaceutical firms, displayed more cash hoarding behavior. Cash growth during the 1995 to 2011 period grew at a 15% annual rate for the pharmaceutical sector and at an 11% annual rate for information technology sector, with some firms seeing cash growing as much as 26% a year. Expressed as a percentage of assets, cash holdings roughly doubled from 1995 to 2011.
The researchers believe that this increase in cash holdings represents "structural factors and is likely to be independent of the financial crisis." Because firms with big R&D budgets might build more cash than other firms might to invest at some point, the growing importance of tech, pharmaceutical and other R&D intensive industries in our economy means that cash holdings, economy-wide, would grow in tandem.
But why not invest some of that now? The researchers conclude, "Although the magnitude of the effect is not clear, it seems that designing and communicating a long-run plan to deal with the increasing fiscal deficit would reduce uncertainty about future taxes, reduce abnormal cash holdings and potentially favor private investment." We can only hope that the impasse in Washington will be resolved soon, and then perhaps growth may accelerate from increased investment.