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What are the risks of a company holding too much cash?

Excess cash has 3 negative impacts: It lowers your return on assets. It increases your cost of capital. It increases overall risk by destroying business value and can create an overly confident management team.

Why do firms hold so much cash a tax based explanation?

The US and many other countries tax the foreign income of their firms, but these taxes can be deferred until earnings are repatriated. As a result, US multinational firms have an incentive to retain earnings abroad, and to a large extent, these firms hold these funds in cash.

Why would a company hold so much cash?

If cash is more or less a permanent feature of the companys balance sheet, investors need to ask why the money is not being put to use. Cash could be there because management has run out of investment opportunities or is too short-sighted and doesnt know what to do with the money.

Why do US firms hold so much more cash than they used to summary?

The average cash ratio increases over the sample period because the cash flow of American firms has become riskier, these firms hold fewer inventories and accounts receivable, and the typical firm spends more on RD. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio.

Why do companies hold so much cash?

Investors should recognize, moreover, that companies in cyclical industries, like manufacturing, have to keep cash reserves to ride out cyclical downturns. These companies need to stockpile cash well in excess of what they need in the short term.

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