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Why Do Firms Hold So Much Cash?

Why do companies hold so much cash when traditional finance theory suggests they shouldn’t? In this interview, Neng Wang (Cheung Kong Graduate School of Business) explains new research on the “cash puzzle,” showing how financing costs, long-term trends, and unpredictable shocks—like COVID-19—drive firms to build large buffers. He discusses whether cash is best seen as a rainy-day fund or an investment tool, when savings are efficient versus wasteful, and why in today’s uncertain, high-rate environment firms are likely to keep hoarding cash rather than return it. 0:00 Why do firms hold so much cash despite theory saying otherwise? 4:00 Is cash mainly a buffer or a tool for investment? 5:15 For CFOs and investors, is cash wasteful or a smart strategy? 6:57 Is “idle capital” efficient or risky for the economy? 8:05 With today’s shocks and high rates, will firms hoard more cash or return it?