Abstract

The average cash to assets ratio for U.S. industrial firms increases by 129 % from 1980 to 2004. Because of this increase in the average cash ratio, firms at the end of the sample period can pay back all of their debt obligations with their cash holdings, so that the average firm has no leverage when leverage is measured by net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms, but is more pronounced for firms that do not pay dividends. The average cash ratio increases over the sample period because firms change: their cash flow becomes riskier, they hold fewer inventories and accounts receivable, and are increasingly R&D intensive. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio. Considerable media attention has been devoted to the increase in cash holdings of U.S. firms. For instance, a recent article in the Wall Street Journal states that “The piles of cash and stockpile of repurchased shares at [big U.S. companies] have hit record levels”. 1 In this paper, we investigate how the cash holdings of American firms have evolved since 1980 and whether existing models of cash holdings help explain this evolution. We find that there is a secular increase in the cash holdings of the typical firm from 1980-2004. In a regression of the average cash-to-assets ratio on a constant and time, time has a

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