Corporate Cash Holdings: Determinants, Agency Costs, and the Cash Flow Puzzle

Abstract

Corporate cash holdings—firms’ decisions to hold liquid assets rather than investing in real projects or returning capital to shareholders—have increased dramatically over the past three decades. U.S. non-financial corporations held approximately $2.3 trillion in cash and short-term investments in 2022, with cash-to-asset ratios roughly doubling from approximately 10% in 1980 to 20% by 2020. This secular rise in cash holdings is the ‘cash puzzle’—a violation of the Modigliani-Miller principle that firms without profitable investment opportunities should return capital to shareholders rather than holding depreciating real balances. Bates, Kahle, and Stulz (2009) in the Journal of Finance documented the rising cash trend and identified its principal drivers: increased cash flow volatility (raising precautionary demand for liquid buffers), reduced capital expenditure intensity (declining tangible asset collateral), increased R&D intensity (more reliance on intangible assets with high financial distress costs), and more broadly, the shift toward knowledge-intensive industries where human capital is the primary asset. This paper reviews cash holding theories, the secular rise evidence, and the role of multinational taxation and financial constraints.