Impact of economic policy uncertainty on cash holdings: firm-level evidence from an emerging market

Xunan Feng · Yung Ling Lo · Kam C. Chan

74 citations0/0 files storedAsia-Pacific Journal of Accounting & Economics

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Corporate Finance and Governance Working Capital and Financial Performance COVID-19 Pandemic Impacts

Abstract

We examine how economic policy uncertainty (EPU) affects firms’ cash holdings and how such changes in cash holdings affect firm value and capital investment in China. Our findings suggest that firms that increase their cash holdings during high EPU have higher firm values and are less negatively impacted by the underinvestment problem. When a firm is non-state-owned, financially constrained, or is located in a province with low marketization, the impact of EPU on cash holdings is amplified. Furthermore, state-owned enterprises (SOEs) are less likely to increase cash holdings during elevated EPU, and consequently tend to have lower firm values.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1998Law and Finance 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997A Survey of Corporate Governance 1977Determinants of corporate borrowing 1936The General Theory of Employment, Interest and Money.2016Measuring Economic Policy Uncertainty*1984Financial Intermediation and Delegated Monitoring

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