Since the horrible cash crisis of 2008, business are holding onto a significant amount of more cash. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, in 1980 firms only held 12 percent of assets in cash. But this number almost doubled by 2011, amounting to approximately 22 percent of assets being held in the corporate cash reserve. The rise in the corporate cash reserve has caused significant speculation toward the reason or reasons for this significant spike. The following information presents potential causes for why corporations are holding onto more cash than ever before in history.
There are factual macroeconomic factors that undoubtedly lead to the reasons behind the rise in the corporate cash reserve. One potential reason corporations have increased their corporate cash reserve is because capacity utilization is extremely low. According to Forbes, during 2008 through 2009, U.S. industrial utilization plummeted from 80% to a staggering 67%, which represented the lowest it has ever been. Yet, this rate was even more dramatic for certain sectors such as the automotive sector, which suffered a 35% decline. The other reason is because of the extremely low inflation rate, which significantly lowers the opportunity cost of holding cash. For example, instead of purchasing inventory, corporations are more likely to hold the cash because the value of the inventory is much more likely to stay in tune with inflation.
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