Monday, August 02, 2010
Corporate Cash Hoarding
Fortune has a good article on the issue of whether 'corporate cash hoarding' is sustainable. The article refers to the fact that many companies have chosen to build up large piles of cash on their balance sheet. President Obama and many others have been arguing that these firms should be investing this capital instead of "hoarding" the cash. This Fortune article suggests that firms may be sitting on the cash for now due to the uncertainty surrounding the economy and government policy, but that this situation cannot last forever. Eventually, firms will be forced by their shareholders to either issue large dividends, or invest the cash in new equipment, employees, and the like. I think that's generally right, though I would offer one very important caveat. Many firms may be revisiting their views regarding their optimal capital structure after this financial crisis. That may mean that they choose to permanently hold more cash and maintain less debt than they had in the pre-2007 world. That means cash levels may fall as firms finally begin to invest, but they may not dwindle to pre-2007 levels. Moreover, that choice may not represent hoarding at all, but instead, a sound decision regarding capital structure.