THE JOURNAL OF FINANCE
VOL. LXIV, NO. 5
Why Do U.S. Firms Hold So Much More Cash
than They Used To?
THOMAS W. BATES, KATHLEEN M. KAHLE, and REN
E M. STULZ
The average cash-to-assets ratio for U.S. industrial firms more than doubles from
1980 to 2006. A measure of the economic importance of this increase is that at the
end of the sample period, the average firm can retire all debt obligations with its cash
holdings. Cash ratios increase because firms’ cash f lows become riskier. In addition,
firms change: They hold fewer inventories and receivables and are increasingly R&D
intensive. While the precautionary motive for cash holdings plays an important role
in explaining the increase in cash ratios, we find no consistent evidence that agency
conflicts contribute to the increase.
ONSIDERABLE MEDIA ATTENTION
has been devoted to the increase in cash holdings
of U.S. firms. For instance, a recent article in The Wall Street Journal states that
“The piles of cash and stockpile of repurchased shares at [big U.S. companies]
have hit record levels.”
In this paper, we investigate how the cash holdings of
U.S. firms have evolved since 1980 and whether this evolution can be explained
by changes in known determinants of cash holdings. We document a secular
increase in the cash holdings of the typical firm from 1980 to 2006. In a re-
gression of the average cash-to-assets ratio on a constant and time, time has a
significantly positive coefficient, implying that the average cash-to-assets ratio
(the cash ratio) has increased by 0.46% per year. Another way to see this evolu-
tion is that the average cash ratio more than doubles over our sample period,
from 10.5% in 1980 to 23.2% in 2006.
Everything else equal, following Jensen (1986), we would expect firms with
agency problems to accumulate cash if they do not have good investment oppor-
tunities and their management does not want to return cash to shareholders.
In the absence of agency problems, improvements in information and financial
Thomas Bates is from the W.P. Carey School of Business, Arizona State University. Kathleen
Kahle is from the Terry College of Business, University of Georgia. Ren
e Stulz is the Everett D.
Reese Chair of Banking and Monetary Economics, Fisher College of Business, Ohio State Univer-
sity and is affiliated with NBER and ECGI. We are grateful to Viral Acharya, Heitor Almeida,
Murillo Campello, John Cochrane, Harry DeAngelo, Gene Fama, John Graham, Campbell Harvey,
Mike Lemmon, Bill Maxwell, Ronald Oaxaca, Amir Sufi, J
ome Taillard, Luigi Zingales, seminar
participants at the Hong Kong University of Science and Technology, National University of Singa-
pore, University of Alberta, University of Arkansas, and the University of Chicago, an anonymous
referee, and an anonymous associate editor for helpful comments. Bates and Kahle completed much
of this work while on the faculty at the Eller College of Management, University of Arizona.
Ian McDonald, “Capital Pains: Big Cash Hoards,” The Wall Street Journal, July 21, 2006, p.C1.