Policy Uncertainty and Firm Cash Holdings

Abstract

This research examines the relations between government economic policy uncertainty and firm cash holdings and the value of cash. We find robust evidence that policy uncertainty is positively related to corporate cash holdings due to firms’ precautionary motives and investment delays. Policy uncertainty adversely affects the value of cash to shareholders of firms with high growth opportunities because it motivates these firms to hold cash for precautionary purpose while discouraging them from deploying cash for investment. In contrast, policy uncertainty has a positive effect on the value of cash to shareholders of firms with low growth opportunities because it enables these firms to exploit profitable acquisition opportunities while discouraging them from overinvesting in capital expenditures.