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Money Never Sleeps: The Real Reasons for the Cash Build-up on Corporate Balance Sheets – C.D. Howe Institute

January 16, 2013

TORONTO, Jan. 16, 2013 /CNW/ – While critics have raised alarms about
the rising cash holdings on corporate balance sheets, there are
broader, long-term reasons for the move to cash that go far beyond a
knee-jerk reaction by business to current economic uncertainty,
according to a new report from the C.D. Howe Institute. In “Not Dead
Yet: The Changing Role of Cash on Corporate Balance Sheets,” Finn
Poschmann finds corporate cash holdings have increased in waves over
the past quarter-century in response to changing economic conditions
and business process improvements.

“The critics’ outcry over corporate cash hoards, which has gone so far
as to accuse business of malfeasance, is mistaken,” commented
Poschmann. “A closer look suggests more to the story.”

Poschmann finds that while corporate cash as a share of assets has risen
in the past decade, the share of other, non-income-earning current
asset components, such as inventories and accounts receivable, has
significantly fallen. “Businesses appear to have been responding to
long-term trends in economic conditions, including enhanced business
processes that have shrunk inventories, by better managing their
balance sheets,” said Poschmann. “Businesses have been shoring up
financial assets to match liabilities, in part for precautionary
reasons; there is no economic problem or market failure to be addressed
and, accordingly, no policy action indicated in response,” noted the
author.

Poschmann provides in-depth evidence for his argument in data going back
to the 1950s, which show that businesses, overall, are keeping less
inventory on hand for reasons that range from the global shipping
container revolution to better management information systems and
just-in-time delivery methods. These changing business conditions,
along with a precautionary approach to economic headwinds, tell the
real story, said Poschmann. “Assets held in cash-like forms, which earn
interest, and provide cushions against unexpected events, can fund
future investments and are a lot less dormant than holdings in
inventories and accounts receivable, which typically have zero
returns.”

For the report go to: http://www.cdhowe.org/not-dead-yet-the-changing-role-of-cash-on-corporate-balance-sheets/20092

SOURCE C.D. Howe Institute


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