Why are corporations holding so much cash?
Date posted: October 16, 2013
If you’re looking for money today, go to the nearest corporation. It’s reported that corporations have record amounts of cash on hand. Is this unusual, and if it is, why is it happening? N.C. State University economist Mike Walden responds.
“Well, it is unusual in the sense that just like people, if you hold cash in your pocket, you’re not really putting that cash to work for you. You’re not buying things that you want, or you’re not investing it. So we do have to ask the question, why are corporations holding so much cash, which they are.
“I think there are a couple of potential explanations. One is that there is still an uncertain outlook for the economy. And just like for people, if you’re worried about the future, you’re probably going to keep more cash on hand. Well, businesses do the same thing. So I think number one, it’s a sign there are still questions about the economy.
“Secondly, corporations in the past have been spending a lot on research and development. That’s a very important part of their expenditure pattern. And they really pulled back from that during the recession. Now, many people think that one reason why they’re holding so much cash is that they’re planning to spend on research and development once they become a little bit more certain about the future. So that would actually be a good thing.
“And then lastly, some people say, well, corporations are simply poised, they’re ready to pounce — if you will — on some major new investments. Again, they’re just waiting for the right time. Now, if that’s the reason and if and when that does occur, that could be a big, big boost for the economy.”
Category: Economic Perspective