St. Louis Fed Corporate Cash Study
The Federal Reserve Bank of St. Louis wrote earlier this month on "Financing R&D Spending: The Role of Corporate Cash Holdings." The summary says, "Research and development (R&D) investment and productivity growth have long been recognized as central drivers of economic growth. Yet innovation is inherently difficult to finance externally: It is intangible, risky and subject to severe asymmetric information. As a result, firms with higher R&D intensity -- R&D expenditures divided by total assets -- tend to hold a larger share of their assets in cash." It tells us, "In recent years, with the need to invest in artificial intelligence (AI), it has become more important to understand the role of cash. For example, 'hyperscalers' have announced their investment plans on their AI-related projects at unprecedented levels. In this blog post, we will explore how cash holdings and R&D intensity of U.S. firms have changed over time. We will also discuss possible implications of these trends for the future given the increase in AI-related investment." The study explains, "For our analysis, we studied firms that are U.S. incorporated and publicly traded between 1979 and 2024 using S&P Compustat data. We focused on nonfinancial and nonutility firms because financial firms are likely to hold cash for different reasons, such as liquidity requirements, and utility firms are likely to be regulated. Variables were inflation-adjusted to 2017 U.S. dollars and were converted into U.S. dollars if reported in other currencies." It adds, "The first figure displays the distribution of the cash ratio among firms from 1979 to 2024, showing the time series of the 25th, 50th, 75th and 90th percentiles as well as the mean, all weighted by firm assets. The cash ratio is defined as cash and short-term investments divided by total assets. Weighting by firm assets gives greater weight to larger firms, so the statistics reflect where most corporate assets were held rather than treating all firms as equal in size. In simple terms, the figure shows how much cash firms held relative to their asset size, and how this differed across the distribution -- from firms holding relatively little cash (25th percentile) to those holding substantially more (90th percentile), as well as the typical firm (the 50th percentile, or median) and the average firm (mean). The figure illustrates a pronounced upward trend in cash holdings, particularly between 1990 and 2010. Over that period, the mean and median increased by 9.1 percentage points and 8.2 percentage points, respectively. More recently, however, the pattern has partially reversed. From 2020 to 2024, the mean and median declined by 3.4 percentage points and 1.3 percentage points, respectively. The decline is even sharper at the top of the distribution, with the 90th percentile falling by 14.9 percentage points."
