Since the end of the recession, U.S. public companies have amassed record amounts of cash. They’re not using it to hire people or, in many cases, to develop new products and services. Instead, it is sitting in corporate treasuries — or more likely, bouncing around the shadow banking system. Juan Sanchez and Emircan Yurdagul of the Federal Reserve Bank of St. Louis have a new paper that seeks to answer the question, why? I warn you, it’s worky going.
Here’s the shorthand: This is a new phenomenon. In 2011, companies were holding four times as much cash as in 1995 and 11 times as much as in 1979. The reasons don’t appear to be correlated to research and development, worries over taxes if foreign earnings are repatriated, or volatility in sales and cash flow. The two researchers find a closer tie to uncertainty over productivity and policy.
The first is closely tied to the Great Recession, or, as they write, “the idea is that firms learn from experience.” Companies that entered the Panic of 2008 with a strong cushion survived and performed well. If every Joe and Jill Schmo that answers an online poll believes the financial system remains dangerous, it’s a safe bet that corporate leaders do, too.More