The Evolution of Corporate Cash

• DOI: http://doi.org/10.1111/jacf.12316
• Author: Mark T. Leary,John R. Graham
• Date: 01 December 2018
• Published date: 01 December 2018

IN THIS ISSUE:

Corporate

Governance

and Short-

Termism

8Are U.S. Companies Too Short-Term Oriented? Some oughts

Steven N. Kaplan, University of Chicago

19 Who Are the Short-Termists?

Wei Jiang, Columbia University

27 Corporate Short-Termism and How It Happens

Greg Milano, Fortuna Advisors

36 e Evolution of Corporate Cash

John R. Graham, Duke University and NBER, and Mark T. Leary, Washington University

in St. Louis and NBER

61 Do Staggered Boards Matter for Firm Value?

Yakov Amihud, New York University; Markus Schmid, University of St. Gallen;

and Steven Davidoff Solomon, University of California Berkeley

78 e Market Price of Managerial Indiscretions

Brandon N. Cline, Mississippi State University; Ralph A. Walkling, Drexel University;

and Adam S. Yore, University of Missouri

89 How Have Green Companies Fared in Transactions with Banks?

A Stakeholder-Management Perspective

Dawei Jin, Zhongnan University of Economics and Law; Liuling Liu, Bowling Green State

University; Jun Ma, Tsinghua University; Haizhi Wang, Illinois Institute of Technology;

and Desheng Yin, East China Normal University

VOLUME 30

NUMBER 4

FALL 2018

APPLIED

CORPORATE FINANCE

Journal of

36 Journal of Applied Corporate Finance • Volume 30 Number 4 Fall 2018

T

While these st udies provide helpful insights, to fully under-

stand what is dierent about today’s cash policies and the

likely causes of cha nges in corporate ca sh over time, it is

important to put the recent trends in historica l perspec-

tive. In a study published recently in e Re view of Financial

Studies, we gathered data on U.S. companies going back to

1920 to provide a perspective that encompasses almost a

century of corporate cash and liquidity management. And

in the pages that follow, we summarize the main  ndings

of this study.

One of our most notable findings has been the

substantial va riation in cash holdings over the past centur y

that can be seen in Figure 1 (on the next page). Today’s

high average cash ba lances were also experienced in the

1940s. These peaks were sandw iched between decade s

when the average cash-to-assets ratio was less t han half

what it is today. At the same time, it’s interesting to note

that the aggregate, or total, cash holdings of U.S. public

companies behaved dierent ly than their average balances.

In particula r, aggregate cash d id not increase as rapidly

as average cash during the 1980s and 1990s. And today’s

aggregate holdings a re not much higher than they were

during the 1920s, though they rose shar ply in the ’30s a nd

’40s before falling during the midd le of the century. is

begs the question of whether these sh ifts in cash holdings are

attributable to deliberate changes in corporate cash polic y

during the last 100 years —or to changes in macroeconomic

conditions or in the kinds of companies going a nd staying

public over that time.

To understand these changing patterns in cash holdings,

we performed separate “cross-sectional” and “time-series”

analyses that led to several new insights. First,cross-sectional

patterns in cash holdings—that is, comparisons among

dierent kinds of companies in a given year—have been very

stable over the past 90 years. e kinds of companies that

have operated with high cash-to-assets ratios in recent years—

riskier companies with growth opportunities and little if any

prots or use of debt—have had large cash holdings in nearly

every decade during the last century. And the same stability

is true among companies holding low amounts of cash. As in

the past, relatively low-growth and low-risk public companies

producing steady income and cash have continued to operate

with lower levels of cash.

But even with these stable cross-sectional relationships,

by John R. Graham, Duke University and NBER, and Mark T. Leary, Washington University in St. Louis and NBER*

he large increase in the cash balances of U.S. public companies in recent years

has garnered much attention in both the academic literature and popular press.

Several explanations have been proposed for this apparent shift in corporate policies.

Some studies have suggested that the riskiness of corporate cash ows has increased over time.1

Others have focused on changes in the nature of corporate assets and in the kinds of compa-

nies that go public.

2

And still others have examined the effect of U.S. repatriation tax law in

trapping foreign cash abroad.3

e Evolution of Corporate Cash

*This is a shorter, less technical version of the ar ticle that was published in The Re-

view of Financial Studies, Volume 31, Issue 8, 2018, pp. 4288-4344.

We thank Alon Brav, Murillo Campello, Ian Dew-Becker, Amy Dittmar, Ran Duchin,

Mike Faulkender, Michelle Hanlon, Andrew Karolyi (editor), Lil Mills, Michael Roberts,

Rene Stulz, and Shawn Thomas; two anonymous referees; and seminar participants at

the AFA annual meeting, Amsterdam, BI Norwegian Business School, Colorado, Dela-

ware, Duke, HBS, LBS, LSE, Maryland, Michigan, Michigan State, Missouri, South

Florida, Temple, Wharton School of Business, and the University of Pennsylvania Law

School for helpful comments. We also thank Song Ma and Steve Sims for excellent re-

search assistance. Send correspondence to John Graham, Fuqua School of Business,

100 Fuqua Drive, Durham, NC, 27708, telephone: 919-660-7857. Email: john.gra-

ham@duke.edu.

1 See Bates, Kahle, and Stulz (2009). Full citations of all studies are provided in the

References at the end of the article.

2 See Falato, Kadyrzhanova, and Sim (2013); Booth and Zhou (2013); and Begenau

and Palazzo (2017).

3 See Faulkender, Hankins, and Petersen (2018).