Economic policy uncertainty,institutional environments,and corporate cash holdings |
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Institution: | 1. Campus Saint-Jean, University of Alberta, 8406, Rue Marie-Anne-Gaboury (91 Street), Edmonton, AB T6C 4G9, Canada;2. Moore School of Business, University of South Carolina, 1014 Greene Street, Columbia, SC 29208, USA;3. Pamplin College of Business, Virginia Tech, 1030 Pamplin Hall, Blacksburg, VA 24061, USA;4. Chambers College of Business and Economics, West Virginia University, 83 Beechurst Ave, Morgantown, WV 26505, USA |
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Abstract: | We investigate the effect of economic policy uncertainty (EPU) on corporate cash holdings using a large sample of international firms. EPU intensifies concerns of investors on managerial self-dealing and political extraction. Consequently, the potential cost of cash holdings (i.e., expropriation) outweighs its benefit (i.e., precautionary motives), and the optimal amount of cash holdings decreases. We find supportive evidence that firms hold less cash when EPU is high. We further show that the market discounts excess cash holdings under high policy uncertainty, but this negative effect is mitigated by stronger investor protection, better freedom of press, and better government quality. |
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Keywords: | Policy uncertainty Cash holdings Investor protection Press freedom Government quality |
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