Stockpiling Cash: How Much Is Enough?

Date01 November 2014
DOIhttp://doi.org/10.1002/jcaf.22001
Published date01 November 2014
AuthorCathy J. Cole
29
© 2014 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22001
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Cathy J. Cole
Stockpiling Cash: How Much Is Enough?
As managers at
public companies
prepare to iden-
tify and discuss their
company’s internal
and external sources
of liquidity for inclu-
sion in the Securities
and Exchange Com-
mission’s (SEC’s) 2014
regulatory filings, it is
interesting to note that
some of the largest
U.S. public companies
are currently hold-
ing large stockpiles of
cash [approximately $1
trillion for the largest
1,000 companies (REL
Consultancy, 2013)].
According to REL
Consultancy, the cash
balances grew by approximately
50% between 2008—the depths
of the recession—and 2012. In
a survey of the approximately
1,100 companies, Moody’s
found that a group of five pri-
marily high-technology compa-
nies held 25% of the total cash
at the end of 2013 [Moody’s
study, as cited in the Wall Street
Journal , Anonymous, 2014].
While the growth in cash may
have been exacerbated in recent
years as a precautionary reac-
tion to the global financial
crisis, the rise in cash holdings
at U.S. companies is not just
a recent phenomenon. The
average cash-to-assets ratio
for a sample of approximately
13,600 independent U.S. firms
more than doubled from 1980
to 2006 (Bates, Kahle, & Stulz,
2009).
COMMON MD&A DISCLOSURES
From the disclosure stand-
point, having a stockpile of
cash on the balance sheet may
seem to make the discussion of
liquidity and capital resources
much easier, since the potential
for a liquidity deficiency seems
remote. However,
limitations on trans-
fers can make much
of even a large cash
balance inacces-
sible. The SEC’s
management discus-
sion and analysis
(MD&A) rules
and their inter-
pretations place a
heavier emphasis
on identifying and
addressing potential
liquidity deficien-
cies [e.g., Item
303(a)(1) of Regu-
lation S-K, (U.S.
SEC, n.d.)] rather
than on address-
ing possi ble cash
gluts. This greater
focus on liquidity deficiencies
is appropriate from a regula-
tory standpoint, since abun-
dant cash does not threaten the
viability of the firm. Further,
determining whether a particu-
lar public company has excess
cash is an issue subject to con-
siderable debate. However, even
firms with abundant cash must
discuss the company’s liquidity
situation in MD&A.
With the growth in cash bal-
ances in recent years, limitations
on the use of such cash have
become important disclosures
in MD&A. In that regard, the
We all know that companies have been stockpiling
cash. But how much is enough? What is optimal?
The author of this article reminds us that while
the cash on U.S. companies’ balance sheets may
have risen in recent years as a precautionary reac-
tion to the global financial crisis, the rise in cash
holdings at U.S. companies is not just a recent
phenomenon. And when addressing significant
cash balances in management discussion and
analysis (MD&A), companies must consider limita-
tions on cash accessibility and changes or trends
in liquidity that may be particularly relevant as the
economy improves. Regarding the size of cash
balances, recent studies in finance and account-
ing have developed models to predict optimal cash
levels, which may be useful in assessing the levels
of cash on company balance sheets.
© 2014 Wiley Periodicals, Inc.

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