NEW YORK – Non-financial “superstar firms” like Google, GM, and Apple are not just the producers of some of the world’s favorite products and services – they also act as sophisticated global financial firms with actively managed financial portfolios. But despite their enormous financial power, they’re not regulated like financial actors, giving them the flexibility to maximize their financial portfolios with little oversight. According to new research from Columbia Business School Professor of Finance Olivier M. Darmouni and Finance PhD candidate Lira Mota, these firms’ complex financial portfolios have changed drastically in composition since President Trump’s 2017 Tax Cuts and Jobs Act, revealing that many companies have been managing their portfolios with tax optimization in mind.
Non-financial firms should have stable finances to run their company and pay their employees, but the researchers reveal that major American multinationals’ financial departments are far more complex. Examining the financial assets of the largest non-financial firms in the U.S., the researchers find that these firms’ financial departments manage much more than “cash balance sheets,” extending beyond core business operations to craft actively managed financial portfolios. Apple has as much as $260 billion in assets, which surpasses the combined assets of two of the biggest U.S. banks, Citi and PNC, combined. Depending on measurements, the tech company would be among the country’s largest banks.
“These superstar firms hold financial portfolios whose level and composition are actively managed to maximize tax incentives and reach for yield, as opposed to simply alleviating financial constraints,” says Professor Darmouni. “In fact, the shift in composition of these holdings since the 2017 tax reform reveals that the firms actually hoard financial assets in order to delay repatriating offshore earnings until a tax holiday arrives. The way these firms are using their portfolios to avoid taxation actually likens their financial arms to shell companies – a point regulators might consider looking at more closely.”
The working paper, “The Financial Assets of Non-Financial Firms,” is based on a completely original dataset, hand curated by the researchers. The data compiles the corporate financial assets of the 200 biggest U.S. firms over the past 20 years, including Boeing, Coca-Cola, Comcast, Target, and Disney, constructed from micro-data found in corporate filings. The data differentiates the research from other studies on corporate financial holdings: while conventional data sources are based on common balance sheet items such as “cash and cash equivalents” and “short-term investments,” this dataset looks into firms’ holdings of major asset classes, ranging from cash and money market funds to various types of bonds and equities – offering unprecedented insight into the firms’ portfolios.
As some of the largest contributors to the economy, these firms’ patterns in financial management have consequences for issues such as inequality, regulation, capital allocation and pricing. These issues have been front and center amid the recent economic downturn following COVID-19. In response to the growing recession, the researchers’ data identified a collective movement to shore up liquidity buffers, revealing a dramatic shift towards cash-like instruments and the safest types of securities such as Treasuries during this time, making the firms active players in money and securities markets. While much is still being learned about the impact of the corporate rush for cash during this time, policymakers should recognize the influence of these companies in the market, the researchers argue, in order to put the protections in place to ensure these companies don’t have outsize influence.
“We urge policymakers to closely examine the way that these firms are regulated going forward, and the COVID-19 recession is a good example of why,” Professor Darmouni says. “For decades, many of these companies have appeared to be cash-rich on paper - particularly with large corporate bond holdings - but this economic downturn demonstrates that their “cash” is not helpful in crisis times. For instance, during the crisis, Ford issued debt to raise cash, without touching its corporate bond portfolio. That’s a concerning sign. If firms pursue liquidity during a recession, they have the potential to influence the corporate bond and treasury markets, not to mention, these financial portfolios boost stock market valuations somewhat artificially.”
Key Takeaways Include:
- NON-CASH ASSETS TAKE THE LEAD - Marketable securities are responsible for the majority of the growth of these firms’ financial assets since 2007. While total financial assets have grown by $1T in the researchers’ sample, cash-like instruments only grew by $350B – just a third of total growth. In recent years, bond portfolios are at least as large as cash balances.
- MAJOR UPTICK IN CORPORATE BOND HOLDINGS - Specifically, the researchers show a meteoric rise of corporate bond holdings – now totaling 25% of all corporate financial assets.
- BLACK BOX OF RISK - Little is known about the major risks these companies take because of the lack of regulation of their financial holdings.
- MARKET MANIPULATION - The financial assets of non-financial firms can boost stock market valuations artificially, potentially manipulating the market.
The study can be found online: here.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About the researchers
Professor Olivier Darmouni is a financial economist whose research interests span corporate finance, banking and industrial organization. He applies a variety of empirical methods...Read more.