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Why are U.S. firms holding so much cash? an exploration of cross-sectional variation

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  • Juan M. Sanchez
  • Emircan Yurdagul

Abstract

Currently U.S. firms hold record amounts of cash. The authors explore cross-sectional variation in cash holdings of U.S. publicly traded firms to shed light on the reasons for this recent trend. First, they identify factors that correlate with cash holdings and then examine the evolution of these factors over the past decade. Several factors, including research and development expenditures and idiosyncratic uncertainty, are important in accounting for cross-sectional differences in cash holdings. However, these factors do not increase over time as cash holdings do; thus, it seems unlikely that they underlie the increase in cash holdings. Aggregate uncertainty, however, has recently reached record levels. This uncertainty, combined with the fact that (idiosyncratic) uncertainty correlates well with cash holdings in the cross section of firms, suggests aggregate uncertainty may be an important factor accounting for the recent trend in increased cash holdings.

Suggested Citation

  • Juan M. Sanchez & Emircan Yurdagul, 2013. "Why are U.S. firms holding so much cash? an exploration of cross-sectional variation," Review, Federal Reserve Bank of St. Louis, vol. 95(July), pages 293-325.
    • Handle: RePEc:fip:fedlrv:y:2013:i:july:p:293-325:n:v.95no.4
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    Cited by:

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    3. KHAN, Asad & BIBI, Memoona & TANVEER, Sarfaraz, 2016. "The Impact Of Corporate Governance On Cash Holdings: A Comparative Study Of The Manufacturing And Service Industry," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 20(3), pages 40-79.
    4. Zachary Bethune & Guillaume Rocheteau & Tsz-Nga Wong & Cathy Zhang, 2022. "Lending Relationships and Optimal Monetary Policy [A Comprehensive Revision of the U.S. Monetary Services (Divisia) Indexes]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 1833-1872.
    5. Constantine Barasa & George Achoki & Amos Njuguna, 2018. "Determinants of Corporate Cash Holding of Non-Financial Firms Listed on the Nairobi Securities Exchange," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(9), pages 222-222, August.
    6. Berent Tomasz & Śniechowski Maciej, 2023. "Corporate sector cash holding – optimal levels, macro context, or external shocks?," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 59(4), pages 297-314, December.
    7. Silva, Mario Rafael, 2019. "Corporate finance, monetary policy, and aggregate demand," Journal of Economic Dynamics and Control, Elsevier, vol. 102(C), pages 1-28.
    8. Marwick, Alex & Hasan, Mostafa Monzur & Luo, Tianpei, 2020. "Organization capital and corporate cash holdings," International Review of Financial Analysis, Elsevier, vol. 68(C).
    9. Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan & Tarhan, Vefa, 2017. "The impact of liquidity crises on cash flow sensitivities," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 225-239.
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