Navigating through Economic Policy Uncertainty: The Role of Corporate Cash Holdings

Abstract

We find that U.S. corporations increase their cash holdings in response to higher economic policy uncertainty. The increase in cash holdings is not attributed to a reduction in firm investments. This increase is more pronounced for financially constrained firms or those with larger exposure to policy uncertainty. Holding more cash in the presence of policy uncertainty alleviates the negative impact of policy uncertainty on capital investment and firm innovation outputs. Our findings demonstrate that cash holdings represent an important channel in mitigating the negative effect of policy uncertainty on firm real economic activities.

Keywords: Policy uncertainty; cash holdings; financial constraints; corporate innovation; investment.

JEL Classification: G18; G31; G32