Home country uncertainty and cash holdings: Evidence from multinational subsidiaries in South Korea

Abstract

Using data on South Korean subsidiaries with 18 different countries of origin and a newspaper-based economic policy uncertainty (EPU) index, we investigate the effect of uncertainty transmission on multinationals’ key decisions. Subsidiaries of multinational corporations face host and home country uncertainty. We document that Korean subsidiaries significantly increase their cash holdings when EPU increases in their home countries, indicating that national uncertainty shocks are transmitted to other countries through multinational networks. We further show a more pronounced home EPU effect when parent companies hold a greater share of subsidiary equity. The home EPU effect is robust to the inclusion of additional home country factors and alternative definitions of home EPU and cash holdings. Additionally, we find that subsidiaries reduce their capital expenditures when their home EPU increases.