Views on improving the integrity of global capital markets
16 January 2012

Excess Cash on the Balance Sheet? Globally, Investors Trust Corporations to Keep It, with a Few Exceptions

In a recent survey, CFA Institute asked our members what companies should do with excess cash held on their corporate balance sheets. We asked if they preferred that corporations retain their cash to make investments or self-fund corporate activities, or return the cash to shareowners through an increase in dividends, a special dividend, or a share buyback. We offered a noncommittal other option for the indecisive. The answers were illuminating, pointing to economic and perhaps cultural differences among respondents in markets around the world.

In aggregate, survey respondents trusted corporations to retain the cash at a rate of about 54 percent, and asked that the cash go back to investors at a rate of about 40 percent, with the remainder undecided. Financial professionals in markets such as Canada, Brazil, and Australia differed little from the global consensus.

Perhaps not surprisingly, those in the United States were some of the most likely to champion giving the cash back to shareowners through an increased dividend or a stock buyback, as 49 percent of survey respondents chose this option. Meanwhile, about 40 percent called on companies to hold on to the cash. Somewhat surprisingly — and likely for very different reasons than their American counterparts —  exactly half of survey respondents in Russia (50 percent) thought cash would be better spent in the hands of shareowners, and only 43 percent trusted the corporation to do what was best. In Japan, 51 percent favored a cash infusion for shareowners, while 46 percent supported the company keeping the cash.

Different flavors of distrust that a company can invest more efficiently than the individual are likely behind some of this sentiment in each market. The United States has always had a culture that trusts the individual over the large organization. In Japan, we may be seeing a culture that has traditionally deferred to the will of the many and to the corporation shaken in that belief after decades of stagnation and recent corporate governance scandals. Russia’s current brand of state capitalism, in which minority shareowner rights can never be taken for granted, likely spurs survey respondents to ask for the cash when they can get it.

Perhaps most surprising was the rate at which some markets felt the best use of bursting cash coffers was  to retain those earnings, often in ratios well over 2 to 1 relative to those who favored turning the money over to shareowners.

Topping the list of those seeking to keep the cash with the corporate treasury were survey respondents in France and Germany, where 69 percent felt companies should keep the cash. Approximately a quarter of those surveyed in each market believed shareowners would put the cash to better use. Next came the countries of the Gulf Cooperation Council or GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE), where 68 percent felt companies should keep the cash. Next in line was India, where 67 percent deferred to the judgment of companies. In Hong Kong, 63 percent said the company should retain the earnings while 61 percent in China felt this way.

It’s no surprise that France and Germany are advocating cash hoarding (Switzerland came in at 65 percent and the United Kingdom at 58 percent) as their banks may face very large bills soon in defense of the Euro and to meet their Basel III capital requirements. Countries in the GCC and Asia likely see better growth prospects ahead and wish to have plenty of powder dry for attractive investment opportunities.

So while a majority globally supports retention, companies will have some breathing room to decide what to do with their cash hordes. And given recent experiences in banking and liquidity crises, they might be wise to keep it buried in their backyards.

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About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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