Professors Publish Research on High Cash Holdings of Multinational Companies

November 02, 2012

The National Bureau of Economic Research recently published research titled “Multinationals and the High Cash Holdings Puzzle” by Lee Pinkowitz, associate professor of finance, and Rohan Williamson, professor of finance, at Georgetown University’s McDonough School of Business, as well as René Stulz, chair of banking and monetary economics at Ohio State University’s Fisher College of Business.

The authors investigated why the cash holdings of American multinational companies increased sharply in the early 2000s and continue to be unusually high since the financial crisis. 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 study indicated no evidence that the increase in cash holdings of multinational firms was due to tax treatment of profit repatriations, that it is intrinsically linked to their R&D intensity, and firms that become multinational do not increase their abnormal cash holdings after they become multinational. Instead, it appears firms who became multinationals have attributes that led them to hold large amounts of cash, even before they become multinationals. The authors did not find that poor investment opportunities or poor governance can explain the high cash holdings of U.S. firms since 2008.

Analyzing data on all non-financial and non-regulated public firms with assets and market capitalization greater than $5 million per year, Pinkowitz, Williamson, and Stulz compared 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.