RegionsAsia PacificAustralian companies boost cash holdings

Australian companies boost cash holdings

A report by the Reserve Bank of Australia suggests that carrying cash allows executives at public companies to wield greater control.

Australia’s listed companies are likely to be increasingly conserving cash partly because senior managers personally benefit from the phenomenon, according to the Reserve Bank of Australia (RBA).

In its discussion paper, entitled ‘Why Do Companies Hold Cash?’, the RBA’s Gianni La Cava and Callan Windsor suggests that cash can allow them to “put their own interests above those of shareholders”.

The authors note that “agency costs” – where the interests of managers and shareholders clash – is among the likely reasons behind growing cash holdings at Australia’s listed companies.

“By holding cash, managers increase the amount of assets under their control and gain discretionary power over the company’s investment decisions,” the report states. “(They) have an incentive to divert resources to activities that personally benefit them.”

According to the Organisation for Economic Co-operation and Development (OECD), among companies that are not financial industry players, Australia ranks second only to Israel for cash on hand as a proportion of total assets at just over 25% and ahead of the US, ranked third at about 21%.

The report says that Australian public companies may be more likely than private ones to accumulate money out of cash flows “during good times” because they face higher agency costs.

“In the case of cash holdings, agency costs can include the costs incurred if the manager uses cash to overinvest in negative net present value (loss-making) projects or the costs involved in aligning the incentives of managers with shareholders through appropriate remuneration packages.”

However, the authors add that corporate Australia’s appetite for cash holdings is not principally related to a grasp for power.

The authors also find the increase in cash holdings among public companies over the past 25 years is “largely explained” by greater opportunities to invest for growth. “Publicly listed companies today have better investment opportunities,” they write.

The report also finds that Australia’s listed companies are more likely to operate in industries with more volatile earnings, such as IT, pharmaceuticals and biotechnology, that increases their need for more cash.

“After accounting for these factors, our estimates indicate that, by historical standards, corporate cash holdings of Australian publicly listed companies are not unusually high,” the report states.

The report concludes that there is cause for optimism as companies are stashing cash for growth. “High levels of corporate cash could be taken as evidence that economic conditions are expected to improve in the future, rather than being a sign of perceived weakness in the economy.”

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