Or so many companies appear to think these days. Research by one academic has uncovered a possible reason for the dramatic rise in cash reserves among U.S. firms over the last few decades.

A more recent buildup of cash, in a time of stubbornly low interest rates, has been chalked up to anxieties arising from the Great Recession of 2008. Following that debacle, many banks pulled back from various aspects of supply-chain financing. Some smaller businesses could no longer obtain loans at all.

Meanwhile, transportation costs were plunging, the result of a deregulated trucking industry and slack demand for its services. And businesses were coming under intense pressure to cut supply-chain costs to the bone.

The result was a shrinking of inventory levels, as companies moved to the “just-in-time” model of order fulfillment. If transportation was cheap, and suppliers sufficiently responsive, they could fill orders without the need for huge buffer stocks that weighed down balance sheets. Or so goes the theory.

Shawn Thomas, professor of finance at the University of Pittsburgh’s Katz Graduate School of Business, undertook research to explore the link between falling inventory levels and rising cash reserves. He notes a dramatic increase over the past four decades in the average share of U.S. publicly traded companies’ assets held as cash.

There have been numerous theories explaining the trend, including a shift from manufacturing to technology-based companies, and tax policies that keep U.S. companies from repatriating foreign earnings. But Thomas focused on the decline in inventory holdings, which appeared to closely track the rise in cash holdings. His question: Are companies holding on to cash as a hedge against the risk that comes from operating at barebones inventory levels?

Developments in financial markets over the years, including access to progressively cheaper external financing, should have served as encouragement for companies to minimize their own cash holdings, Thomas points out. The fact that cash reserves have continued to rise across nearly all business sectors is “a real puzzle,” he says.

Going back to the 1970s, inventory used to account for around 25 percent of assets, and cash 5 percent. Today, the numbers are almost reversed: inventory at 10 percent and cash between 20 and 25 percent. The result, says Thomas, has been “a massive substitution of cash holdings for inventory.”

Are the two trends linked, or merely coincidental? Given that the sum of cash plus inventory as a percentage of total assets has remained constant over that time — around 30 percent — Thomas believes the former to be true.

Thomas and his fellow researchers didn’t assume a connection at the start. “We take great pains to try to determine if one is causing the other,” he says.

The paper notes a change in the nature of supply-chain risk has over the years. Companies have sharply reduced their reliance on buffer stock as a hedge against potential disruptions. Cash, on the other hand, has proved to be a more flexible tool for responding to snarls in the supply chain.

Thomas cites the West Coast longshore slowdown of 2014-2015 as an example of businesses adopting a different approach to risk management. With dockworkers refusing to unload ships full of seasonal merchandise, apparel makers drew on cash reserves to reproduce the items and rush them to market via air freight. The extra cost was still probably less than filling up warehouses with buffer stock, Thomas suggests.

Banks weren’t likely to step in with the funds needed to get around the port stoppages, he said. “It’s hard to go to a bank and say that we need more money to get our products there. If you have cash on hand, you can move very quickly.”

Thomas’s research focused solely on the public sector, where shareholder pressure to convert some of those holdings to dividends can be intense. Still, companies keep holding on to their cash. Apple Inc.’s cash hoard, for example, topped $250bn this year, a number that was greater than the market capitalization of General Electric. With that money, Apple could have bought any other publicly traded firm, Thomas notes.

The recent string of natural disasters — earthquakes, tsunamis, floods, hurricanes and the like — has raised companies’ awareness of the need for a solid risk-management strategy. The type of disruption that can be avoided through the deployment of buffer stock has proved to be relatively rare, says Thomas. Cash, on the other hand, provides the solution to any number of scenarios.

The firms that are most vulnerable to supply-chain disruptions are those with the greatest percentage of fixed costs. Inventory falls squarely within that category. Thomas doesn’t believe it’s a coincidence that companies with the highest fixed costs tend to retain more cash in order to reduce those expenses.

He isn’t arguing that inventory reductions are the sole reason behind rising cash reserves. A lot of cash remains trapped in foreign operations because of the high tax consequences of repatriation. And big companies such as Apple are simply pushing inventories further up the chain to reduce their own exposure.

“Our supply-chain risk story doesn’t explain everything,” Thomas concedes. “We think supply-chain risk is somewhere in the top three factors.”

He doesn’t expect companies to draw down on their cash positions in favor of higher inventory levels anytime soon — especially at a time when the risk of supply-chain disruption is higher than ever. “The world has changed,” he says, “at least in the minds of corporate management.”

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