Various Implications of Excessive and Insufficient Cash Balances for Corporations

• Published date: 01 November 2015
• DOI: http://doi.org/10.1002/jcaf.22094
• Date: 01 November 2015

15

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22094

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Various Implications of Excessive

and Insufficient Cash Balances

forCorporations

Gregory L. Prescott

Much has been

written in

recent years

about the vast stock-

piles of cash on cor-

porate balance sheets.

In fact, a Standard &

Poor’s (S&P) Capital

IQ Ratings Direct

Report dated June 11,

2015, indicated that

the universe of nearly

2,000 nonfinancial

companies rated by

the agency held $1.82

trillion in cash and

short‐ and long‐term

investments as of the

end of 2014, up 5%

from the previous

year‐end. Moreover, the latest

increase is a continuation of a

long‐term trend. For instance,

cash and investments for U.S.

nonfinancial companies rated

byS&P amounted to about $700

billion in 2006, topped $1.0tril-

lion in 2009, and has steadily

increased in subsequent years.

“The cash buildup, whichbegan

as a response to uncertain global

economic conditions follow-

ing the Great Recession, has

especially benefitted large U.S.

companies. The top 25 largest

cash holders, which represent a

little more than 1% of the total

number of nonfinancial corpo-

rate issuers we rate, now control

48%, or nearly $900 billion, of

the total cash,” (p. 2), according

to the report.

In light of the

attention given by

the popular and

financial press to

the size of the cash

balances held by

corporations, it is

not surprising that

this topic has also

captured the atten-

tion of academic

researchers. In recent

years, researchers

have investigated

the relationship

between refinancing

risk and the level of

cash holdings, the

potential for cash

levels to affect future

operating performance, how

maintaining excess cash can

impact a firm’s stock market

returns, and how a firm’s deci-

sion to maintain a given level

of cash may impact various

other factors. Therefore, the

purpose of this paper is to

highlight some of the find-

ings of research on the topic

of cash holdings published in

At the end of 2014, corporate balance sheets were

overflowing with a record level of cash and other

liquid investments. While congressional leaders

have implored U.S. businesses to use those

cash balances to fund capital investments and

employ more Americans, in recent years academic

researchers have explored the potential for those

cash holdings to impact firms’ refinancing risk,

operating performance metrics, stock returns, and

other elements related to firm value. This article

reports the findings of four studies published in

recent years in accounting and finance journals on

the subject of cash holdings and various topics of

interest to chief financial officers, controllers, and

other financial professionals. © 2015 Wiley Periodicals, Inc.

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