ValueAct and other investors are reportedly pressing for Microsoft to return more cash to its shareholders, for instance. Prior to unveiling its $60 billion stock buyback plan, Apple had been under pressure from investors, including David Einhorn of Greenlight Capital, to use its cash to reward shareholders.
Disagreement about optimal corporate cash holdings is nothing new, asserts Laurie Simon Hodrick, a visiting scholar at Stanford Institute for Economic Policy Research and Stanford Graduate School of Business.
Holding cash gives companies financial flexibility in times of heightened uncertainty -- and there's plenty of that today, Hodrick wrote in a brief titled, "Are U.S. Firms Really Holding Too Much Cash?"
"Firms choose their optimal cash holding in response to existing market challenges. These currently include 1) an uncertain economic environment following the financial crisis, 2) an uncertain fiscal environment, including ongoing debates about the corporate tax structure and the federal government budget, and 3) an uncertain monetary environment, including challenges to the sustainability of historically low interest rates as the Federal Reserve discontinues its quantitative easing policies," Hodrick wrote.
"If the economy continues to recover and uncertainty about future growth rates and fiscal and monetary policies declines, the option value of holding cash will decline. If heightened uncertainty continues, however, these firms will continue to hold high cash levels."
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