Strategic Cash Portfolio Management in the Face of Policy Uncertainty: Evidence from U.S. Firms

Julian Atanassov, Gabriele Lattanzio and Bektemir Ysmailov
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Julian Atanassov: University of Nebraska
Gabriele Lattanzio: University of New Hampshire
Bektemir Ysmailov: Nazarbayev University, Graduate School of Business

No 2024/03, Working Papers from Nazarbayev University, Graduate School of Business

Abstract: We document that during periods of heightened policy uncertainty, firms rebalance their cash portfolios away from riskier marketable securities and toward safer, more liquid assets. Our findings are robust to instrumental variable analyses, alternative model specifications, and varying definitions of policy uncertainty. The effect is stronger among financially constrained firms, firms with greater external financing needs, firms in highly competitive product markets, and highly intangible firms - consistent with precautionary motives. However, we also find evidence consistent with an investment-delay channel, whereby heightened policy uncertainty induces firms to postpone investment, creating temporary excess liquidity that may be allocated to marketable securities. By uncovering this nuanced behavior, our findings provide new insights into corporate financial decision-making under uncertainty and how firms manage liquidity and risk.

Keywords: political risk; corporate cash; precautionary savings; real options; investment (search for similar items in EconPapers)
JEL-codes: G30 G31 G32 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2024-10
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