Not Dead Yet: The Changing Role of Cash on Corporate Balance Sheets

Public alarms have sounded over the rising holdings of cash on Canadian businesses’ balance sheets. Critics have alleged the hoards reflect a market failure or collective business failure to invest productively in new machinery and equipment. A closer look at the situation suggests more to the story. While corporate cash as a share of assets has risen in the past decade, the share of other, non-income-earning current asset components, such as inventories and accounts receivable, has significantly fallen. Businesses appear to have been responding to long-term trends in economic conditions, including enhanced business processes that have shrunk inventories, by better managing their balance sheets. Evidence therefore suggests that businesses ha ve been shoring up financial assets to match liabilities, in part for precautionary reasons, that there is no economic problem or market failure to be addressed and, accordingly, no policy action indicated in response.