Cash Holdings

This chapter examines the significant increase in cash holdings by U.S. corporations since the 1980s, focusing on the precautionary motive, agency conflicts, and tax implications. The analysis reveals that firms hold more cash to avoid transaction costs and external finance costs, with cash flow volatility, investment opportunities, and product market competition playing crucial roles. The chapter also explores how agency conflicts between shareholders and managers influence cash retention and the value of cash holdings. Additionally, it discusses the tax motivations for holding cash abroad, particularly for multinational firms. The study highlights the methodological challenges in measuring excess cash, financing constraints, and the marginal value of cash, providing a comprehensive overview of the determinants and effects of corporate cash holdings. Professionals will gain insights into the strategic reasons behind increased cash retention and the implications for corporate finance and investment strategies.