Corporations with Lots of Cash and Doing Little Spending - Essay Example

The paper "Corporations with Lots of Cash and Doing Little Spending" is a great example of an essay on finance and accounting. The article Corporations Hoard Cash as a Precautionary Measure, by David McLean not merely highlights the trend towards cash hoarding by contemporary corporations, which is much supported by the available empirical evidence, but also nudges the informed readers to analyze the valid reasons for the susceptibility of the corporations in the current times to hoard cash. Realistically speaking, varied plausible explanations can be put forward to account for this trend. 

            One explanation furnished by McLean in the article under consideration is that most of the corporations hoarding cash are pressed by volatile cash flow and that much of the cash being hoarded by them is being accrued through public stock issuance. Further, a significant proportion of this cash is being diverted by the companies in the R&D endeavors. In a way this trend towards cash hoarding and pushed up R&D effort on the part of modern corporations is quite explainable in terms of the Modern School of Economics. The Neo-Classical School held technology to be a constant factor. However, as per the Modern School, technology is the vital input that helps halt the diminishing marginal returns in these times marred by the rampant recession. Thus, realistically speaking, relevant R&D driven technological inputs are the one essential potent tool at the disposal of the companies to meet the fast altering consumer preferences and to keep the average marginal costs under constraints, so as to make their products affordable to the consumers depressed by recession and gravitating towards an augmenting sentiment for saving. Taking into account the ongoing recession and the inflicted consumer sentiment, firms could hardly depend on market dependent cash flows to fund these R&D efforts. Moreover, since times immemorial, capital markets have always been the pivotal source for capital accumulation by corporations.

            There is no denying the fact that this trend towards cash hoarding by corporations does not portend well of the job markets in the United States of America. As the given article explains that the corporations are not pumping the cash accumulated by them into enhancing productivity. Rather they are investing it to boost their R&D effort and that too in a futuristic context. So, this hoarded cash could not be positively expected to push productivity and to create more jobs in the labor markets in the times to come. This is indeed indicative of a pessimistic sentiment rampant amongst the corporations. To put it simply, this approach could be expected to reinforce the depleting consumer and investor sentiment, at least in the short run.

            In conclusion, the hoarding of cash on the part of corporations and dedicating it predominantly towards R&D expenditure only certainly does not portend well for the economy. Appropriate steps ought to be taken by the government and the concerned institutions to ameliorate this pessimistic sentiment amongst the corporations and firms.