Economic Cycle, Uncertainty of Economic Policy and Cash Holding of Listed Companies

Qianqian Wang

doi:10.4236/me.2019.101019

Abstract

Based on the systematic review and economic analysis of the theoretical literature, we consider not only the impact of the economic cycle or the economic policy uncertainty (EPU) on the cash holding ratio, but also the comprehensive impact of the two on the cash holding rate. We raise the research hypothesis by using the data from 2004-2015 in the A-share listed companies which are listed in Shanghai and Shenzhen securities exchange as research samples. The empirical results show that: 1) There are respectively negative correlation between the economic cycle and the cash holding of listed companies, and positive correlation between the EPU and the cash holding. 2) During the boom, the cash holdings are significantly positive with the current EPU and the last stage; during the recession, the cash holdings of listed companies is significantly negatively correlated with the current EPU, while positive with the last stage. 3) We further examine the role of the economic cycle and the EPU on the cash holding value, and find that EPU will reduce the cash holding value. 4) When the economy is booming, the increase in EPU will reduce the market value of corporate cash holdings, but it is not significant. During recession, the increase in EPU will increase the market value of cash holdings.

Highlights

Cash is equivalent to the company’s “blood”, and holding liquid assets such as cash help companies to obtain valuable investment opportunities in the future [1]
When the economic cycle is in prosperous stage, the economic policy uncertainty (EPU) in the short term is positively correlated with the cash holding level of listed companies
The empirical results show that economic cycle is significantly negatively correlated with the cash holding level of listed companies, while EPU is significantly positively correlated with cash holdings

Summary

Introduction

Cash is equivalent to the company’s “blood”, and holding liquid assets such as cash help companies to obtain valuable investment opportunities in the future [1]. A large number of companies have been in financial crisis due to the impact of the macroeconomic environment, even bankrupt for the collapse of the capital chain. Many scholars have begun to pay attention to the macroeconomic environment for the company’s liquidity management, especially the impact on the company’s cash holding decisions. According to a study by Vinod [2], companies can respond to changes in the macroeconomic environment and quickly adjust the company’s cash holdings to the optimal level recognized by management. The results showed that increasing cash holdings and strengthening liquidity management have become the main positive responses to the financial crisis

Objectives

Results

Conclusion