Companies’ Financial Surpluses and Cash/Deposit Holdings

Shin-ichi Fukuda ()

Public Policy Review, 2018, vol. 14, issue 3, 369-396

Abstract: Japanese corporations have increased their financial surpluses and cash/deposit holdings dramatically in recent years. Financial surpluses increased because Japanese firms have achieved earnings recovery to enhance their financial soundness. However, most financial surpluses are held in the form of liquid deposits carrying interest rates close to zero, leading to Japanese firms’ slack return on equity. This paper analyzes what caused growing corporate cash/deposit holdings and considers what corporate governance is desirable for Japanese companies. After reviewing previous related studies, the paper uses a three-period model to theoretically explain the mechanism by which firms hold highly liquid assets. It then looks into why Japanese firms increased highly liquid deposits in recent years using industry- level data and individual firm-level data. The empirical analysis shows that Japanese firms showing a sharp increase in liquid deposits is in marked contrast between small and medium-sized enterprises (SMEs) and large enterprises. That is, SMEs tended to hold liquid deposits by precautionary motivation to mitigate future borrowing constraints. In contrast, large firms tended to hold liquid deposits because they have failed to realize potential investment opportunities in the domestic market while facing such opportunities. We find that some blue-chip companies have raised long-term, low-interest funds to increase liquid deposit holdings as growth funds for potential new investment opportunities.

Keywords: Financial surpluses; companies’ cash and deposits; corporate governance (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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