Various Implications of Excessive and Insufficient Cash Balances for Corporations

Published date01 November 2015
Date01 November 2015
© 2015 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22094
Various Implications of Excessive
and Insufficient Cash Balances
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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