Corporate Exposure to Macroeconomic Uncertainties and Cash Holdings

Abstract

This study aims to clarify the understanding on the relationship between the firm’s cash holdings and its causes by introducing the more detailed relationship between cash holdings and macroeconomic uncertainty. While previous literature tries to explain the level of cash holdings mainly by the firm-level variables with the partial inclusion of macroeconomic uncertainty, this study considers the full impact of the macroeconomic uncertainty on the change in the level of cash holdings by understanding and introducing the firm’s heterogeneous exposure to macroeconomic uncertainty. Firms’ heterogeneity to macroeconomic uncertainty is introduced in the test to see if the heterogeneity can tell the difference in the change in the level of cash holdings. This paper finds that macroeconomic uncertainties measured by difference macroeconomic condition variables are significant and contribute to the change in cash holdings. Additionally, this paper shows that the firms’ different level of exposure to macroeconomic uncertainty can cause the different degree of cash holdings and that firms with the higher level of exposure have the higher level of cash holdings. This paper can be improved and expanded in many ways such as an expansion with the inclusion of international macroeconomic variables as additional significant factors for the change in the level of firms’ cash holdings.