Environmental uncertainty and corporate cash holdings: The moderating role of CEO ability

Abstract

AbstractThis article empirically tests the association between environmental uncertainty and corporate cash holdings and whether CEO ability moderates this association. Based on the precautionary motive for holding cash, we predict that firms will hold more cash when operating in an environment of high uncertainty. To test this prediction, we utilize a panel of non‐financial U.S. firms throughout 1980–2016. Using the coefficient of variation in sales as a proxy for environmental uncertainty, we find that environmental uncertainty increases firm cash holding. We then explore the moderating role of CEO ability and find that more‐able CEOs weaken the positive association between environmental uncertainty and cash holding. Further, the results demonstrate that small‐sized, financially sound, and low leveraged firms are likely to hoard more cash during periods of heightened uncertainty. Our study provides new insights for investors, shareholders, and policymakers into companies' decision‐making concerning liquid assets.