RDP 2016-03: Why Do Companies Hold Cash? 5. Stylised Facts

In this section we document some stylised facts about Australian corporate cash holdings. We use both company-level databases to examine the associations between corporate cash holdings and various company-level characteristics, with a particular focus on three key characteristics: the size, ‘riskiness’ and ‘age’ of the company. Because private and unlisted public companies are directly comparable within the same database, we also look for any interesting differences between the cash management behaviour of unlisted public versus private companies.

Trends in the cash-to-assets ratio of unlisted public, private and listed public companies are provided in the top panel of Figure 5. Since the mid 2000s, the unlisted public company cash ratio has been broadly unchanged, while for private companies, it appears that the cash ratio has been edging higher. Interestingly, the global financial crisis did not have a discernible effect on corporate cash holdings, at least in aggregate.

Looking at the longer-term trend for listed public companies, the mean cash ratio peaked in 2007 at 36 per cent, about three times higher than the trough in 1990.^[20] Since 2012, however, listed public companies' cash holdings have decreased relative to total assets.

To examine the role of size we split companies into quartiles based on their real assets (Figure 5, second panel). Small companies tend to hold relatively more cash than large companies, on average. This is true regardless of whether they are a public (unlisted or listed) or private company. For example, within unlisted public companies, the cash ratio of the smallest companies is over 30 percentage points higher than the cash ratio of the largest companies, on average. Similarly, the mean cash ratio of the smallest private companies is over 20 percentage points higher than that of the largest private companies. These differences are, at least in part, explained by the fact that larger companies – and in particular, larger public companies – are more likely to have a credit rating and an established reputation in debt markets, thereby making it cheaper to tap outside funds.^[21] This points to some preliminary evidence in favour of the financing frictions hypothesis.

Industry risk also appears to be important to average cash holdings, which is consistent with the presence of financing frictions and a precautionary saving motive (Figure 5, third panel). Companies in industries with riskier cash flows typically hold more cash (where RISK is measured using a rolling standard deviation of the cash flow-to-assets ratio). This is generally true for all company types. Also consistent with the precautionary saving motive, it appears that younger public companies tend to hold more cash than their older counterparts. However, the relationship between age and cash is noticeably weaker for private companies.

Finally, we directly compare the cash ratios of unlisted public and private companies within the D&B database. We find that unlisted public companies hold more cash than private companies, on average. This is true even within size, risk and age groups (Table 3). This provides some preliminary evidence in support of the idea that agency costs affect corporate cash holdings.

Footnotes

The mean plotted here is an unweighted mean across all companies. The asset-weighted cash ratio exhibits a less-pronounced run up, peaking at 10 per cent in 2009, 4 percentage points higher than the trough in 1994. [20]

They are also more likely to have lines of credit, thereby making them less reliant on liquid asset holdings. For example, Sufi (2009) finds that size is a strong predictor of the use of credit lines among US companies. [21]