Why Are Companies Sitting on Cash Right Now?

The article examines why U.S. nonbanking firms are holding unprecedented levels of cash—totaling $6.9 trillion, or about 20% of their total assets—despite low returns relative to borrowing costs. It identifies three traditional reasons for excess cash holdings: investment and operational flexibility, managerial opportunism, and multinational tax strategies. The authors introduce a new explanation called “precautionary cash holdings,” showing through analysis of delisting events that cash acts as insurance against sudden economic shocks that can lead to firm failure, especially for small or vulnerable firms. Their research suggests that for these firms, cash is a necessary operating asset to manage uncertainty and reduce the risk of delisting, rather than a surplus. The article advises managers and boards to tailor cash holdings to their firm’s specific risks and to communicate the strategic insurance value of cash to shareholders. [Extracted from the article]