Flight to Safety May No Longer Include America
By Viral Acharya, C.V. Starr Professor of Economics & Heitor Almeida
Corporate cash has become a potential source of flight capital in the marketplace, taking account of the failure of the super-committee to strike a deal on reducing the country’s debt.
While many might think the safe haven status of US Treasuries has expired, especially in light of Standard & Poor’s recent downgrade of US debt, corporate chief financial officers have not downgraded Treasuries just yet.
But corporate cash has become a potential source of flight capital in the marketplace, taking account of the failure of the super-committee to strike a deal on reducing the country’s debt.
In the wake of the credit crisis, corporate finance chiefs are sitting on huge piles of cash, typically held in bank deposits, money market funds and US Treasuries. By some estimates they retain close to $2 trillion of cash on their balance sheets. The adage “Cash is King” rings true during economic crises because it allows companies to survive and continue financing their investments irrespective of the scale of the mayhem.
Our research shows that measures of aggregate risk predict changes in corporate cash holdings. For example, corporate cash holdings tend to go up following increases in Vix, the market’s “fear index”. This pattern appears to have repeated itself in the recent market turmoil.
Read full article as published in Financial News.