Morgan Stanley IM: Cash Holdings: Data, Theory, and Alternatives

• The goal of this report is to discern the proper amount of cash a company should hold, which takes us into key topics around capital allocation and capital structure.
• Cash is at the same time a non-productive holding that creates a drag on return on invested capital, as well as a resource that provides flexibility to make future investments that create value.
• We start by sharing empirical data on the cash holdings of public companies in the U.S. since 1970, which reveals a steady rise since 1990 driven by a change in mix toward sectors that invest more heavily in intangible assets.
• Next we discuss theories of why companies hold cash and then we review their options should they choose to disburse excess cash.
• We observe a positive correlation between the level of cash holdings and how much a company invests in intangibles, how small the company is, how concentrated the company is, and if it’s in the introduction stage of the life cycle.

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