I’ll just add here that tax law and SEC regs (or lack thereof) cause two additional incentives *NOT* to keep cash around.

First off, keeping cash around isn’t free. It’s sitting somewhere, earning interest (at least), which is…..taxable to the corporation.

Secondly, and although this hasn’t happened much lately — possibly because CEO’s got wise to the practice, a corporation with a lot of cash risks becoming a target for an unfriendly acquisition — — financed by their very own cash.

(For those who don’t know how that works, let’s go through the process. Company A wants to buy Company B. Company A suggests to Company B that they sell out. Company B says no; often times this is because Company A is a private equity firm that doesn’t have good intentions towards Company B and it’s employees.

Company B has a lot of cash on its balance sheet. So, Company A gathers up all their own cash, then goes to the bank; they show the banker Company B’s balance sheet with all that cash, and the banker lends Company A the money they need to finance a hostile takeover, using Company B’s own cash as collateral.)

So, that’s another reason why companies don’t keep a lot of cash around.