The savings of corporate giants

In financial markets, people often assume that hedge funds and money managers are the biggest holders of corporate bonds. But research shows that that designation actually goes to large corporations like Apple and Alphabet.

In fact, over the past two decades, corporate giants have become some of the largest participants in financial markets, in essence running internal financial institutions in their own right. Most of the growth in their large and complex portfolios is in the form of marketable securities like corporate bonds and U.S. Treasuries — not cash.

It’s a significant development when the future of interest rates is uncertain, as it is now: When interest rates rise, bond values fall, and companies can suffer losses. Currently, market watchers are anticipating a cut in interest rates, but the timing is unclear as policymakers continue to work to curb inflation.

“Many investors are not aware that these companies are basically operating like financial institutions, that they’re so exposed to risk,” saidLira Mota,an assistant professor of finance at MIT Sloan and co-author of the research paper “The Savings of Corporate Giants.”

Mota and co-author Olivier Darmouni of Columbia Business School found evidence of these hefty holdings by hand-collecting data on financial assets from the annual reports of 200 companies, including Coca-Cola, Disney, and Target, from 2000 to 2021.

They discovered that from 2007 to 2021, corporate giants’ total financial assets grew by $1 trillion, but cashlike instruments grew by only $350 billion. Marketable securities, not cash, were responsible for most of the growth.

Motivating factors

Mota and Darmouni explored two theories as to why corporate giants keep these massive financial portfolios.

According to the first theory, it could be a precautionary measure. Companies might worry that it could be hard to get a loan at a fair rate if they need to access money quickly in times of financial turmoil. Indeed, there was a “dash to cash” and increase in cashlike instruments early on in the COVID-19 pandemic. But Mota and Darmouni found that companies did not use their corporate bonds to meet their liquidity needs; corporate bond holdings did not drop drastically.

“When we look at companies with large financial portfolios, they are not likely the ones that need the precautionary savings,” Mota said. “They actually have very high credit ratings; many are A-rated.”

The second theory has to do with cross-border tax incentives. Historically, many multinationals have used an investment-related strategy to keep from having to pay U.S. taxes. These companies have shifted some of their earnings abroad, holding them in financial assets instead of distributing them, and in that way they’ve managed to avoid paying U.S. taxes.

In late 2017, when the Tax Cuts and Jobs Act was passed to try to curb this behavior, total financial assets did indeed fall from 2017 to 2019, by $400 billion, the researchers found. That was true for companies with a large share of foreign earnings in particular. But the investments didn’t disappear altogether.

Apple, for example, still keeps some $160 billion in financial assets on its balance sheet, according to its September 2023 SEC filing, $70 billion of which is in corporate bonds.

“This means that Apple is one of the largest investors in corporate bonds in the world and, in total size, surpasses the combined financial assets of the sixth- and seventh-largest banks in the United States, namely PNC and Bancorp, respectively,” the authors write.

Consequently, in 2022, Apple’s related asset losses were steep. As interest rates skyrocketed two years ago, Apple lost $10 billion dollars in assets, or some 10% of its net income. This pattern held true for other corporate giants as well: Microsoft experienced $3 billion in losses in 2022.

A lack of transparency

The researchers concluded that cross-border tax incentives are the main driver of companies’ holding marketable securities, whereas liquidity motives drive cashlike instruments. Still, “there are so many open questions as to why these companies maintain these large holdings,” Mota said.

What is clear is that corporate giants’ holdings are far less transparent than those of banks and other major bond holders, such as mutual funds and insurance companies, Mota said. Corporate giants’ losses are also much more opaque.

“For every other big player, we really do have a lot of disclosure,” Mota said. “From an investor’s point of view, corporate giants’ financial investments represent an important risk that we have very little information about. These companies are large enough to cause big swings in asset prices.”

Data sources like Bloomberg, FactSet, and Compustat do not typically track these companies’ financial portfolios. For example, Mota and Darmouni found that although Apple reported $75 billion in “cash and short-term investments” on its balance sheet in 2017, and that is the figure listed in Compustat, the company held $268 billion in financial assets that year.

Companies do have to report the face value of their financial assets, but they currently aren’t required to disclose information at the securities level.

There are pros and cons to that approach, Mota said. More information could help investors better understand risk, and added transparency benefits the financial system. But for companies, opacity could be a corporate advantage that executives don’t want to give up.  

“CFOs probably don’t want shareholders closely monitoring their financial positions,” Mota said.

Oversight needed

Nonetheless, Mota’s research highlights the key role nonfinancial firms play in financial markets: With their outsized positions, they have the potential to cause major price swings, volatile markets, and even future bank collapses that could send ripples throughout the financial system.

In the wake of the Silicon Valley Bank collapse in March 2023, the Federal Reserve and the Federal Deposit Insurance Corp. want banks to increase their liquidity and capital positions and want to require regional banks to disclose their long-term debt requirements and resolution plans. Mota said corporate giants’ financial positions should be part of these types of discussions.

“We do need more disclosure,” Mota said. “If we regulate every financial institution and even hedge funds need give some information about what they’re doing, then why don’t nonfinancial corporates have to as well?”

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