According to data provided by the United States’ Federal Reserve, companies continue to hold massive amounts of cash. Although it is possible to invest this cash, most companies still avoid doing this. This data also shows an increase in corporate debt in spite of the fact that most companies have adequate cash reserves.
We will write a custom Essay on Cash Hoarding by U.S Firms specifically for you
301 certified writers online
Most of the cash held by these companies is in overseas accounts. One of the reasons for this trend is the prevailing low interest rates on loans. Other companies might be doing this to avoid the tax bill that is usually associated with offshore investments. Although this issue has been addressed by various economists, this trend has been on the rise over the last few years. It is important to understand the advantages and disadvantages of this practice. Some of the companies involved in this practice will also be covered.
One advantage of hoarding cash is that it makes it possible for companies to grow wealth. Most firms have more successful investments overseas than they have locally. Returns on these investments are mostly reinvested and this increases a firm’s wealth. The profits earned through local investments are mostly paid out in form of dividends. Shareholders have been asking for more cash returns on their investments yet they still need to increase the value of their investments. Cash hoarded overseas makes this possible.
In the United States, all investments brought from overseas attract a thirty-five percent tax. This is why for most companies it is easier to reinvest the earnings because they will attract a lesser tax bill. Another advantage of having huge cash reserves is that they act as buffers in case of economic meltdowns. This is usually the time when it is harder to borrow money and the price of assets is lower.
Hoarding cash is a practice many economists frown upon. One of its disadvantages is that it can play a major part in slowing down an economy. In times of economic slowdowns, an economy requires as much stimulation as possible. Subsequently, cash hoarding only makes the situation worse. The president of the United States is on record encouraging companies to invest and hire more.
Another drawback to hoarding cash is that it attracts a huge opportunity cost (Opler et al. 8). Having excess cash on a firm’s reserves is not justifiable liquidity wise. It also makes it harder to do accurate valuation of companies. It is also clear that during a time of economic recession, stakeholders should be encouraging spending.
During such times, the level of domestic spending is low. When firms join in perpetuating this trend, the level of unemployment is likely to go up. While cash hoarding might be beneficial to a company, its impact on the economy is mostly negative.
In 2011, Apple had revealed that it had over seventy-five billion dollars in cash and marketable securities. In that same year, similar figures for General Electric stood at $136.3 billion. These two balance sheets indicate how far the trend of cash hoarding has advanced. For instance, the amount hoarded by General Electric was over seventy-three billion more than the amount that was being held by the United States’ Treasury department.
Last year, Microsoft borrowed $2.25 billion in spite of having a cash reserve of over forty billion (Kusnadi and Wei 730). Cash hoarding is not restricted to companies like Apple and Microsoft. Last year, a report tabled to the Treasury indicated that American companies had over two trillion dollars in cash reserves.
Kusnadi, Yuanto and Kim Wei. “The Determinants of Corporate Cash Management Policies: Evidence From Around the World.” Journal of Corporate Finance 17.3 (2011): 725-740. Print.
Opler, Tim, et al. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics 52.1 (1999): 3-46. Print.