Cash Reserves during the Financial Crisis
By the end of 2006, the average company in the S&P 500 held approximately 7.9% of its total assets in cash a total amount of 721 billion dollars! Nevertheless, in three years, this figure increased to approximately 1,157 billion dollars. By the end of 2009, the same companies had almost 10% of their total assets invested in cash. This book is dedicated to investigating this increase in cash holdings in the course of only three years, a period that was heavily impacted by a financial crisis. The main objective is to identify what determines a company's decision to enlarge its cash holdings, especially when confronted with an economic downturn. Existing theoretical approaches to explaining cash holdings (such as tradeoff, pecking order and free cash flow theory) are challenged by a data set prone to a severe financial as well as economic crisis.