Share Issuance and Cash Savings
After issuing shares, companies are increasingly saving the proceeds as cash rather than spending the money to build new facilities or hire additional employees. While this might seem suspicious, research by MIT Sloan School of Management Visiting Professor David McLean suggests that it’s actually reflective of increasing precautionary motives.
“It’s always hard to predict how costly it will be to issue equity,” he says. “Recessions and financial crises can make it very costly if not impossible to raise capital so it is sensible for companies that may need outside financing in the future to issue shares when times are good and save the proceeds for when times are bad.”
In his study, McLean examined share-issuance cash savings over a 38-year period in a large sample of U.S. firms. During the 1970s, he found that $1.00 of issuance resulted in $0.23 of cash savings. That is considerably less than in recent years when $1.00 of issuance resulted in $0.60 of cash savings.