Corporate Cash Holdings and Exposure to Macroeconomic Conditions

Abstract

Determinants of a firm’s cash holdings have been a popular topic of research in finance, especially after the rapid surge in cash holdings for U.S. firms since the 1980s. The wide array of research has focused primarily on firm-specific factors to explain the cross-sectional variations but has found insufficient explanatory power for the variations in cash holdings. We incorporate variables for macroeconomic conditions and uncertainty with firm-specific variables. Using 19,223 firms with 213,663 firm-year observations from 1971 to 2019 and introducing five variables for macroeconomic conditions of the Aruoba–Diebold–Scotti index and three variables for macroeconomic and financial uncertainty, we find that a firm’s sensitivity to macroeconomic conditions and uncertainty plays important role in determining the level of cash holdings. We find supportive evidence from the robustness test with the firm’s age that variables for macroeconomic variables have an impact on the level of cash holdings irrespective of the firm’s age.