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

73 Pages Posted: 30 Jan 2017 Last revised: 8 Aug 2018

See all articles by Huu Nhan Duong

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Justin Hung Nguyen

Victoria University of Wellington - Victoria Business School

My Nguyen

RMIT- School of Economics, Finance and Marketing

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Date Written: February 1, 2018

Abstract

We demonstrate the strategic motives of U.S. corporations in holding more cash in response to higher economic policy uncertainty. The positive impact of policy uncertainty on cash holdings is more pronounced for firms that are more exposed to policy uncertainty, with greater financial constraints, but indifferent for those with varying investment irreversibility. Increasing cash holdings in the presence of policy uncertainty enhances shareholder value, weakens the negative impact of policy uncertainty on capital investment and firm innovation output. Our findings highlight cash holdings as an important channel to mitigate the negative effect of policy uncertainty on firm real economic activities.

Keywords: Policy uncertainty; cash holdings; financial constraints; corporate innovation; value of cash holdings

JEL Classification: G18, G31, G32, G34

Suggested Citation

Duong, Huu Nhan and Nguyen, Justin Hung and Nguyen, My and Rhee, S. Ghon, Navigating through Economic Policy Uncertainty: The Role of Corporate Cash Holdings (February 1, 2018). Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2907519 or http://dx.doi.org/10.2139/ssrn.2907519

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Justin Hung Nguyen (Contact Author)

Victoria University of Wellington - Victoria Business School ( email )

23 Lambton Quay
Pipitea
Wellington, 6011
New Zealand

My Nguyen

RMIT- School of Economics, Finance and Marketing ( email )

445 Swanston Street
Melbourne, Victoria 3001
Australia
+61 3 9925 5450 (Phone)

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

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