Corporate Cash Hoarding and The Great Recession |
Did the tendency of corporations to hold excess cash contribute to our economic woes of the past few years?
Last week, we responded to a shoddy defense of corporate cash holdings that appeared in a an op-ed in the Wall Street Journal.
Now, we analyze how these cash holdings really work, and why companies hold cash in the first place:
...Corporations have two reasons to hold cash:
- to fund fluctuations in daily, weekly, or monthly operations
- to invest: in research and development, in growth.
Investors widely believe that risk averse managers routinely keep much more operational cash than makes economic sense...
...Then, these managers turn careless, and waste much of the cash that they do invest, like a teenage shopper at the mall with a paycheck burning a hole in her pocket...
We connect this behavior to The Great Recession of 2008-2010 in this current blog post.
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