Sunday, October 22, 2006

Why firms are holding more cash

Today's NY Times explains why U.S. corporations are increasing their holdings of liquid assets:

Upon analyzing a dozen factors that economic theory suggests could play a role, the professors [Thomas W. Bates, Kathleen M. Kahle, and René M. Stulz] found that the biggest was an increase in risk — as evidenced by factors like unpredictable cash flow. Corporations have become less able to count on steady cash flow from year to year, according to the professors, and despite the growth of a complex derivatives market, companies can’t adequately hedge this risk without holding more cash.
You can obtain the study from the NBER.