Multinationals and the High Cash Holdings Puzzle

Although U.S. firms held less cash than comparable foreign firms in the late-1990s, they held more cash than those firms by 2010.

In Multinationals and the High Cash Holdings Puzzle (NBER Working Paper No. 18120), authors Lee Pinkowitz, René Stulz, and Rohan Williamson find that the cash holdings of American multinational companies increased sharply in the early 2000s and have continued to be unusually high since the financial crisis. Moreover, although U.S. firms held less cash than comparable foreign firms in the late-1990s, they held more cash than those firms by 2010.

The authors analyze data on all non-financial and non-regulated public firms with assets and market capitalization greater than $5 million per year. They compare recent cash holdings with estimates of what these holdings would have been for similar firms in the economic environment of the 1990s. The U.S. corporations' cash holdings after the financial crisis were substantially greater than those of firms with similar characteristics in the late 1990s -- the authors estimate the increase in cash holdings to be about 1.86 percent of assets on average in 2009-10 relative to 1998-2000.

This increase in cash holdings among U.S. firms is confined to multinational firms; domestic firms do not display this pattern. In fact, while U.S. multinational firms had cash holdings similar to those of purely domestic firms in the late 1990s, since the crisis they have held over 3 percent more assets in cash than comparable purely domestic firms.

The authors show that the increase in cash holdings of multinational firms cannot be explained by the tax treatment of profit repatriations. Nor is there evidence that firms that become multinationals start holding more cash after they become multinational. Instead, it appears that firms that become multinationals have attributes that lead them to hold large amounts of cash, even before they become multinationals. The authors do not find that poor investment opportunities, regulation, or poor governance can explain the high cash holdings of U.S. firms since 2008.

--Claire Brunel