Navigating through Economic Policy Uncertainty: The Role of Corporate Cash Holdings
73 Pages Posted: 30 Jan 2017 Last revised: 8 Aug 2018
Date Written: February 1, 2018
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: Suggested Citation