Research shows it’s an increasingly important form of insurance, particularly for small or vulnerable firms.
February 05, 2024
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Summary. Many companies sit on piles of cash, even when rates of return suggest they shouldn’t. Why? Researchers have pointed to multiple reasons, including flexibility for M&A and tax advantages. But new research suggests it’s also a form of insurance, especially for smaller firms. Their likelihood of experiencing an adverse event (measured by the chance of being delisted) is significantly higher when they hold less cash.
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While most Americans have spent down their pandemic savings, non-banking U.S. firms have increased their hoards of cash, reaching $6.9 trillion, an amount larger than the GDP of all but two countries. Even as interest rates have risen, cash now represents $1 out of every $5 of total assets held by non-banking U.S. firms, according to our research.
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Vijay Govindarajan is the Coxe Distinguished Professor at Dartmouth College’s Tuck School of Business, an executive fellow at Harvard Business School, and faculty partner at the Silicon Valley incubator Mach 49. He is a New York Times and Wall Street Journal bestselling author. His latest book is Fusion Strategy: How Real-Time Data and AI Will Power the Industrial Future . His Harvard Business Review articles “Engineering Reverse Innovations” and “Stop the Innovation Wars” won McKinsey Awards for best article published in HBR. His HBR articles “How GE Is Disrupting Itself” and “The CEO’s Role in Business Model Reinvention” are HBR all-time top-50 bestsellers. Follow him on LinkedIn.
Anup Srivastava holds Canada Research Chair in Accounting, Decision Making, and Capital Markets and is a full professor at Haskayne School of Business, University of Calgary. In a series of HBR articles, he examines the management implications of digital disruption. He specializes in the valuation and financial reporting challenges of digital companies. Follow Anup onLinkedIn.
Chandrani Chatterjee is an assistant professor at the University of Texas at Arlington. Her research focusses on financial disclosures, corporate bankruptcy, and corporate decision making. Follow her on LinkedIn.
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New!
HBR Learning
Sharpening Your Business Acumen Course
Accelerate your career with Harvard ManageMentor®. HBR Learning’s online leadership training helps you hone your skills with courses like Sharpening Your Business Acumen. Earn badges to share on LinkedIn and your resume. Access more than 40 courses trusted by Fortune 500 companies.
Take your career to the next level by learning business and finance basics, and developing an enterprise mindset.
Read more on Corporate finance or related topics Business management, Finance and investing, Budgets and budgeting and Financial statements