The Evolution of Corporate Cash

Abstract

We study the evolution of corporate cash holdings from 1920 to 2014. We show that the recent increase in average cash is not unique but is one of three large magnitude changes in average cash over the past century. However, there are several key differences in modern cash holdings relative to the earlier periods: Earlier changes in cash were broad-based and within-firm; in contrast, the modern run-up in average cash is dominated by cash-rich Nasdaq firms entering the sample, with negative or flat within-firm changes. Moreover, the modern increase in aggregate cash did not start until about 2000.Perhaps surprisingly, we find that estimated relations thought to support precautionary and transaction motives for holding cash are weaker or disappear earlier in the century, when financial frictions were arguably more severe. In general, firm characteristics have little ability to explain time-series changes in average or aggregate cash through the century, but macroeconomic forces, corporate profitability and investment, and repatriation tax incentives help fill this gap.