Economic Policy Uncertainty and the Marginal Value of Corporate Cash Holdings

39 Pages Posted: 12 Jul 2021 Last revised: 22 Sep 2022

See all articles by Ziwen Bu

Ziwen Bu

University of Birmingham - Birmingham Business School

Ahmet Karpuz

University of Leeds

Rongbing Xiao

Sun Yat-sen University (SYSU)

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: March 18, 2022

Abstract

This paper studies the relationship between economic policy uncertainty (EPU) and the marginal value of corporate cash holdings. We find that the markets place a lower value on firms’ cash holdings under the high level of EPU. Our quasi-experiment tests relating to the 9/11 terrorist attacks and the gubernatorial elections support the causal relationship between EPU and the value of cash holdings. Further, we show that this relation is more pronounced for firms with less redeployable assets, reduced investments, more investment opportunities, poor corporate governance, or excessive cash. Overall, we reveal that EPU reduces the market value of corporate cash holdings due to investment reductions.

Keywords: Cash holdings; Economic policy uncertainty; Investment

JEL Classification: G18; G30; G32

Suggested Citation

Bu, Ziwen and Karpuz, Ahmet and Xiao, Rongbing and Zhao, Huainan, Economic Policy Uncertainty and the Marginal Value of Corporate Cash Holdings (March 18, 2022). Available at SSRN: https://ssrn.com/abstract=3883384 or http://dx.doi.org/10.2139/ssrn.3883384

Ziwen Bu

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Ahmet Karpuz

University of Leeds ( email )

Leeds LS2 9JT
United Kingdom

Rongbing Xiao (Contact Author)

Sun Yat-sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Huainan Zhao

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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