Summary.
Many companies sit on piles of cash, even when rates of return suggest they shouldn’t. Why? Researchers have pointed to multiple reasons, including flexibility for M&A and tax advantages. But new research suggests it’s also a form of insurance, especially for smaller firms. Their likelihood of experiencing an adverse event (measured by the chance of being delisted) is significantly higher when they hold less cash.
While most Americans have spent down their pandemic savings, non-banking U.S. firms have increased their hoards of cash, reaching $6.9 trillion, an amount larger than the GDP of all but two countries. Even as interest rates have risen, cash now represents $1 out of every $5 of total assets held by non-banking U.S. firms, according to our research.