Corporate Cash Holdings Puzzle and the Role of the Covid-19 Pandemic

Corporate cash holdings decisions represent a key strategic decision for corporate managers, with consequences for the performance of both the corporate and economic growth of a nation. However, empirical studies have found evidence of persistently rising corporate cash holdings. Coincidentally, cash buildup in firms around the world has led to a reduction in dividend payouts over time. Modern-day corporations seem to have adopted a form of mercantilism by stockpiling cash that should otherwise be used for investment. Questions have been asked as to why corporate giants such as Apple have been sitting on large cash piles instead of spending them for growth, product development, and employment creation. The purpose of this chapter is to shed light on the drivers of corporate cash holdings and help readers acquire a better understanding of why firms hold so much cash. This chapter explains the motives behind corporate cash holdings, which include transaction, precautionary, agency, speculative, predation and tax motives. The theories that predict corporate cash holding decisions and how these decisions may be influenced by institutional and macroeconomic conditions are also discussed. The dominant theories of cash holdings are the trade-off, pecking order and agency theories. This chapter also discusses how the COVID-19 outbreak impacted the cash hoarding trend.