Businesses saving more of new shares proceeds.

• Author: Ladd, Scott
• Position: CASH MANAGEMENT

With all the talk of billions in cash "sitting on the sidelines" due to uncertainty about the nation's fiscal future, research undertaken by the Sloan School of Management at Massachusetts Institute of Technology confirms that companies issuing new shares are increasingly saving the proceeds as cash, rather than putting them toward investment and human capital.

David McLean, a visiting professor with the Sloan School and author of the MIT study, suggests that such cash preservation reflects the growing sense of precaution that is guiding many chief executives and chief financial officers.

"It's always hard to predict how costly it will be to issue equity," McLean said. "Recessions and financial crises can make it very costly if not impossible to raise capital, so it is sensible for companies that may need outside financing in the future to issue shares when times are good and save the proceeds for when times are bad."

The study lends some historical perspective to the increased percentage of cash savings. It examined share-issuance cash savings over a 38-year period, focusing on a large sample of U.S. firms. During the 1970s, for instance, McLean said he found that $1 of issuance resulted in a cash savings of 23 cents--far less than in recent years, when S1 of issuance resulted in 60...