CFOs are more grounded in the reality-----Interview with Duke Prof. John Graham--

CFOs are more grounded in the reality-----Interview with Duke Prof. John Graham(2)

2007-06-01 13:22:38 [ Big Normal Small ] 　Comment

Flags from different countries on display in Duke Univeristy Fuqua school of Business

Xing Zong: The depreciation of Chinese currency is portrayed by many political leaders as urgent. But 11% of the CFOs said a revaluation would hurt their firms. In Asia, 28% said it would hurt their firms. Surprising results! Certainly no economic panacea! Why the depreciation would hurt their firms?

Graham: You are right. The CFOs in the United States are not as concerned about the Chinese currency as the politicians appear to be. US companies might acquire companies or form joint ventures in Asia. Once you are in Asia, you look almost like a local company. If I set up a manufacturing facility in China, I don’t really want the Chinese currency to devalue. People who sell in that market are less interested and less worried about the Chinese currency. Politicians say things that are actually hard to achieve. They should realize that any depreciation in the Chinese currency should probably be slow and gradual. The Chinese are not planning on quick and massive devaluation. Because they realize the realities would be slow process.

Xing Zong: Increase the cash holding seems to be a trend. But this is like a double-edge sword. Some cash can help you shield from unexpected negative shocks, but too much cash becomes detrimental to stock returns. How do you balance?

Graham: a couple of things. What you just said is very true. If you hold too much cash, on one hand, what are you going to do with all that cash? You probably earn 2-3%. You could give the money back to investors, and they might be able to earn more than 2-3%. If it holds on to the cash, the company might get sloppy if it has too much cash. Think about it, if you suddenly won $100,000 dollars, you will buy a fancy car, buy a huge TV you probably don’t need. When companies have $30 billion dollars, maybe there is a division of the company performing very poorly, they really should get rid of, but they have so much cash, so they just keep propping up these divisions.

That’s one thought. Too much cash can be bad. Now, can cash be good? Sure! When some unexpected things happen, it is nice to weather the storm without doing some desperation move. However, there are plenty of examples where companies have so much cash that they put off hard decisions. Eventually they are worse off for it.

Having said that, there are companies headquartered in the United States that may have operations overseas, say in Ireland. They make lot of profits in Ireland. If they bring those profits back to the United States, they have to pay extra tax. Sometimes they will just leave the money in Ireland and it shows up on the balance sheet as cash, it would be hard for the company to bring the money back home. Some of the money we see is sort of stuck in various places that would be expensive to bring back.

Xing Zong: On a separate note, do you think Google has too much cash? What should a firm do to determine the optimal amount of cash to hold?

Graham: I haven’t studied Google, I really can’t say anything. In terms of determining the optimal ratio of cash to hold, you look around your industry, what do other companies do? That’s the easy way out. Maybe everybody has too much cash. You need to balance how much money is needed for liquidity. You know, to pay the monthly utility bill. There is also what we call the transactions need for cash.

Xing Zong: The scarcity of skilled labor is contributing to wage inflation. The shortage is particularly notable in consulting, high-tech. Do you think outsourcing will be a solution?

Graham: That’s a great question. Yes, if we ignore the visa issue, right now it is hard for skilled workers to come to the United States. There are potentially a lot of engineers in India, in China, who could come to the United States and help the economy, fill some of the vacancies we have. Some of them we have to produce internally, educating people in accounting or something.

Now my understanding is that, in China there is shortage of really high quality engineers to do certain projects even in China, because some of the high skill people have left China to work elsewhere. There is the world wide shortage. I don’t think off shoring can completely fix an issue like this. In the long run, the economics would teach you, the wages would be bid up for these jobs, the next thing is that more people would become engineers. But I think we are far away from that.

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