Journal of Applied Corporate Finance - Volume 20 - Number 3 - Corporate Cash Policy and How to Manage it with Stock Repurchases

Aug 31, 2026

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The article examines why U.S. public companies hold unusually large cash reserves and how corporate cash policy evolves over time. It reviews evidence that cash buffers are especially valuable in periods of financial trouble, when liquidity can prevent distress and support worthwhile projects. It also addresses shareholder concerns by linking excess cash to agency costs under weak governance, and contrasts payout alternatives with stock repurchases as a flexible tool.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages15

Reading Time38 min

AccessFree to download

Corporate Cash Policy and How to Manage it with Stock Repurchases

Why corporate cash holdings vary and rise

Agency costs of excess cash under weak governance

Options to manage excess cash

VOLUME 20 | NUMBER 3 | SUMMER 2008 Journal of APPLIED CORPORATE FINANCE A M OR GAN STANLEY PUBLICATION In This Issue: Private Equity and Public Equity Private Equity, Corporate Governance, and the Reinvention of the Market for Corporate Control Corporate Cash Policy and How to Manage it with Stock Repurchases The Rise of Accelerated Seasoned Equity Underwritings Re-equitizing Corporate Balance Sheets: Choosing Among the Alternatives SPACs: An Alternative Way to Access the Public Markets Competition and Cooperation among Exchanges: Effects on Corporate Cross-Listing Decisions and Listing Standards Callable Bonds: Better Value Than Advertised? BIG Writing: The Fundamental Discipline of Business Writing 8 Karen H. Wruck, Ohio State University 22 Amy Dittmar, University of Michigan 35 Bernardo Bortolotti, Università di Torino, William Megginson, University of Oklahoma, and Scott B. Smart, Indiana University 58 Jason Draho, Morgan Stanley 68 Robert Berger, Lazard 76 Thomas J. Chemmanur and Jie He, Boston College, and Paolo Fulghieri, University of North Carolina 91 Andrew Kalotay, Andrew Kalotay Associates 100 Michael Sheldon, XMedia Communications, and Janice Willett, University of Rochester Corporate Cash Policy and How to Manage it with Stock Repurchases by Amy Dittmar, University of Michigan* merican public companies are now holding very large amounts of cash. In 2004, the aggregate level of U.S. corporate cash holdings reached an all time high of just under $2 trillion1—an amount equal to roughly 15% of the total U.S. GDP. Although this amount has come down since then, the average level of cash holdings (as shown in Figure 1) has increased fourfold in the last 25 years. Further, as a percentage of total assets (see Figure 2), average cash holdings have jumped from 10% to 23% over roughly the same period. Such high levels of cash may seem surprising, given the current depressed state of the U.S. economy. As a recent New York Times article noted,“Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.”2 But, as I argue in this paper, it is precisely because of the possibility of tough economic times that many companies hold such large amounts of cash. Reserves of cash are especially valuable during periods of financial trouble because they provide a buffer against shortfalls in operating profits—one that can be used to avoid financial distress or provide funding for valuable projects that might otherwise have to be put off. 3 As one would also expect, the need for such a cash buffer differs greatly among companies and, as a result, there is considerable variation in corporate cash holdings. At the end of 2006, for example, one-quarter of all publicly traded U.S. companies held at least 36% of their assets in the form of cash. At the same time, the cash holdings of another quarter of U.S. firms amounted to less than 3.3% of their assets. Why does the level of cash vary so dramatically across companies—and why do these levels change over time? These questions have been the focus of many academic studies, and one of the two main goals of this paper is to review the academic literature on corporate cash policy to provide guidance on how much cash companies should hold to weather possible storms. In so doing, I will try to shed light on why companies now hold so much cash and why this level has been rising. A Storms come to an end, of course. And when industries and markets stabilize, corporate cash requirements may fall. In other words, when the economy begins to turn up, many companies that have accumulated cash in anticipation of tougher times may decide that they have far more cash than they need. For the shareholders of these companies, such high levels ofcash can be cause for concern. A c

FAQs

Why do many U.S. corporations hold large amounts of cash?

Because cash reserves provide a buffer during financial trouble, helping firms avoid distress and fund valuable projects that might otherwise be delayed.

How can excess cash harm shareholders?

Excess cash can create agency costs when managers face limited equity incentives and weak governance, leading to waste or value-destroying acquisitions.

Why are stock repurchases presented as a flexible way to distribute cash?

Open-market repurchases allow firms to distribute cash without committing to a fixed dividend path, giving management the option to start, adjust, or stop based on cash needs and stock conditions.

Aug 31, 2026

Upload by Finn