April 13, 2021
Corporate cash holdings in the second and third quarters of last year as the government quarantine basically caused the economy to stop dead in its tracks. Firms needed to raise money wherever they could to keep them going until such time as virus eased its grip and the economy returned to normal.
The ratio of corporate cash to assets peaked at 14.1% in the second quarter which is far higher than their long-run average of 10.0% (below). Corporations have begun to draw down those cash assets as the vaccine gets the virus under control and life returns to normal. The cash to assets ratio has declined to 12.9% which is still high, but lower than its peak value. It will continue to decline further in the quarters ahead as that cash gets redeployed into investments or stock buybacks.