Foreign shareholders,relative foreign policy uncertainty and corporate cash holdings |
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| Affiliation: | 1. Central University of Finance and Economics, China;2. School of Business, University of Wollongong, Australia;1. School of Humanities and Social Science, Beihang University, Beijing, PR China;2. College of Business, University of Texas at San Antonio, TX, United States;1. School of Accountancy, Southwestern University of Finance and Economics, 555 Liutai Road, Chengdu, China;3. Institute of Accounting and Finance, Shanghai University of Finance and Economics, 111 Wuchuan Road, Shanghai, China;1. School of Business, Trent University, 55 Thornton Road South, Oshawa, ON L1J 5Y1, Canada;2. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, ON L8S 4L8, Canada;3. Center for Economics, Finance and Management Studies, Hunan University, Lushan Road, Yuelu District, Changsha, Hunan Province 410082, China;4. University of Liverpool Management School, Chatham St, Liverpool L69 7ZH, United Kingdom;1. School of Economics, Beijing International Studies University, Beijing, China;2. School of Finance, Capital University of Economics and Business, Beijing, China;3. School of Finance, Central University of Finance and Economics, Beijing, China;1. Sigmund Weis School of Business, Susquehanna University, Selinsgrove, PA 17870, USA;2. Strome College of Business, Old Dominion University, Norfolk, VA 23529, USA;3. Judge Business School, University of Cambridge, UK |
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| Abstract: | Studies have shown that foreign investors hedge risks stemming from economic and political uncertainty in the home country through outward investment. This paper studies how foreign investors' home country risk affects their overseas investment and the host country firms' corporate cash holdings. We find that relative foreign EPU, defined as the difference between foreign investors' home country EPU and the host country of investment EPU, negatively impacts the host country firms' cash holdings through their influences on managerial decision-making. This negative relationship arises from firms' precautionary and transaction motives as foreign investors perceive lower corporate risk and better investment opportunities in the host country firms. Good corporate governance is also instrumental in yielding this negative relationship. The reduction in cash holdings due to high relative foreign EPU is more pronounced if foreign investors' home country legal environment is weaker, the two countries are further apart, and there is little trade partnership between them. |
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