Why Do U.S. Firms Hold So Much More Cash than They Used To?





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    • 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. René Stulz is the Everett D. Reese Chair of Banking and Monetary Economics, Fisher College of Business, Ohio State University 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, Jérôme Taillard, Luigi Zingales, seminar participants at the Hong Kong University of Science and Technology, National University of Singapore, 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.


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 flows 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.