It is well known that Indian companies love to hoard cash, rather than use it to fund new investments or give dividends to shareholders.

The question is: why do firms stash cash when they do not need it?

In a blog post, Anoop Singh, director of the International Monetary Fund’s Asia-Pacific department, offers two fresh explanations in the context of Asian firms. He says, “Asia’s corporate savings puzzle lies at the heart of its economic imbalances”.

First, high corporate savings are related to low levels of corporate governance, so shareholders cannot use their voting power to demand higher dividends and prevent firms from hoarding cash.

Second, Asian companies choose to hoard for a rainy day because of low levels of financial sector development in the region. “The more liberalized the financial market, the less firms hoard cash, because they have easier access to funding and are less worried about being shut out of financial markets,” writes Singh.

It is rational to have a high preference for liquidity.