Cross-country analysis of secular cash trends

This study documents a pronounced secular upward trend in cash holdings which is almost systemic across seven industrialized countries over 1991-2008, with France exhibiting a modest rise and Japan a substantial decline. However, the driving forces underlying the cash pattern are not uniform across countries. While the evolution in firm characteristics necessitated elevated cash balances, the time-varying firm attributes explain the cash trend only in Canada, France, UK and the US. The agency motive plays a role in the rise in cash balances in Germany. Our analysis highlights that the functioning of the financial system is crucial to corporate cash policy as Australia’s cash pattern is driven by shallow private credit markets that curbed cash reserves earlier on and the decelerating cash trend in Japan is ascribed to financial reforms. While there is a degree of commonality in the determinants of cash policies, we find some divergence in cash practices.