Economic Policy Uncertainty, Executives’ Background and Cash Holding

Abstract

The literature shows that economic policy uncertainty affects corporate cash holding. Nevertheless, there is no literature involving the moderating effect of executives’ background and the corresponding economic consequence. China is in the stage of economic transition with weak property rights protection. Therefore, executives’ government working experience helps enterprises to obtain all kinds of benefits. However, different ownership structures may affect the role of executives’ government working experience. Enterprises can establish the connection with the government through controlling shareholders, board of directors and managers. Unlike state owned enterprises, the actual controllers of private owned enterprises are nature persons or non-governmental economic subjects, which are not inherently connected with the government. The government working experience from the board of directors and managers may play a more important role in private owned enterprises. Based on the sample of China listed firms in 1999-2015, the result indicates that when the degree of economic policy uncertainty increases, firms tend to increase their cash holding; the greater the change in the uncertainty is, the greater the change in cash holding is. Executives’ government working experience could mitigate the relation between uncertainty and cash holding in private owned enterprises. Nevertheless, executives’ government working experience could not affect the relation in state owned enterprises. Furthermore, we isolate the part of the impact of economic policy uncertainty and executives’ government working experience on cash holding, and examine how the part of cash holding affects corporate value. We find that cash holding to deal with uncertainty could improve corporate value of the next year; extra cash holding to deal with uncertainty from private owned enterprises whose executives have no government working experience could have a significant positive effect on corporate value. Moreover, our results are robust to different measurement for economic policy uncertainty and cash holding. Our study could provide two suggestions in practice. Firstly, it helps to enhance the understanding of liquidity demand behavior of Chinese enterprises, by providing new evidence for the determinants of cash holding from economic policy uncertainty and executives’ background. Secondly, it helps the government realize that economic policy uncertainty affects the resource allocation of micro-entities, especially private owned enterprises whose executives have no government working experience. In order to strengthen private capital’s confidence in the market, the government should try to maintain the continuity of economic policies and improve their predictability.