Economic policy uncertainty, value of cash and financial crisis

Quoc Trung Tran

doi:10.1108/ejmbe-10-2020-0292

Abstract

PurposeThis paper investigates the effect of economic policy uncertainty on value of cash before and after the global financial crisis.Design/methodology/approachWe investigate the relationship between economic policy uncertainty and value of excess cash based on the valuation model of Fama and French (1998). Baker et al. (2016) news-based index (BBD index) is employed to calculate measures of economic policy uncertainty. Our research sample includes 103,474 observations from 11,000 firms across 19 countries over the period 2004–2016.FindingsWe find that economic policy uncertainty is negatively “positively” related to value of cash in the pre-crisis “post-crisis” period. Moreover, we also document that the positive effect of economic policy uncertainty in the post-crisis period is stronger in financially constrained firms.Originality/valueWhile prior studies find a relationship between economic policy uncertainty and cash levels or the effect of firm-level uncertainty on value of cash, this paper shows how economic policy uncertainty as an institutional environment factor affects value of cash. Moreover, it documents that economic policy uncertainty has opposite effects on value of cash before and after the global financial crisis.

Highlights

Policy making and implementing processes typically result in a large amount of uncertainty in the economy and influence corporate financial behavior (Zhang et al, 2015)
We find that the positive effect of economic policy uncertainty on value of cash is stronger in financially constrained firms during the post-crisis period
Chang et al (2017) document that value of cash holdings are higher under the impact of the global financial crisis. Motivated by these prior studies, this paper investigates the effect of economic policy uncertainty on value of cash before and after the financial crisis

Summary

Introduction

Policy making and implementing processes typically result in a large amount of uncertainty in the economy and influence corporate financial behavior (Zhang et al, 2015). This paper investigates the effect of economic policy uncertainty on value of cash before and after the global financial crisis. Economic policy uncertainty positively affects value of cash during the post-crisis period.

Results

Conclusion