Corporate Financial Asset Holdings Under Economic Policy Uncertainty: Precautionary Saving or Speculating?

Abstract

Nowadays, non-financial corporations invest heavily in financial assets, questioning the traditional boundaries of non-financial firms. We investigate how economic policy uncertainty affects firms’ holding of non-currency financial assets and portfolios of such assets in China. We find that economic policy uncertainty has a negative effect on firms’ non-currency financial asset allocation, and the effect is more pronounced for less financially constrained firms. This result implies that other than precautionary saving,speculation is the underlying motive that drives firms to increase their non-currency financial asset holdings. Further investigation shows that economic policy uncertainty has a negative but weaker impact on financial asset holdings for firms in industries with intensive competition. The results are robust to the use of a variety of specifications and estimation methods.