International trade friction and firm cash holdings

Abstract

In 2017, the United States launched a "301″ investigation, imposed a series of additional tariffs on China, which led to the US-China trade war. In this paper, we investigate the impact of the trade war on firms' cash holdings in the context of China. Our results indicate that the trade frictions have significantly increased cash holdings of manufacturing firms. This effect arises mainly through the channel if increased trade policy uncertainty. Our findings offer direct evidence and guidance for both firm strategy and policymakers in the important trade friction.