Economic policy uncertainty and firm’s cash holding in China: The key role of asset reversibility

Yuanyuan Liu, Jing Li, Guanchun Liu and Chien-Chiang Lee ()

Journal of Asian Economics, 2021, vol. 74, issue C

Abstract: This paper investigates how asset reversibility affects the sensitivity of firm’s cash holding to economic policy uncertainty in China. Using the 2012 national input-output table for 139 industries, we measure the industry-level asset reversibility and match them with nonfinancial publicly listed firms over 2007−2017. The results show that asset reversibility has a significant and negative effect on the positive uncertainty-cash holding sensitivity, especially for firms with more severe financial constraints. Furthermore, we find that firms with higher asset reversibility invest more in fixed assets, suggesting that real investment is an important mechanism. In addition, baseline results are robust to potential endogeneity and alternative measures of asset reversibility and economic policy uncertainty. Our findings reveal that asset market friction is a critical determinant of firm’s cash holding.

Keywords: Asset reversibility; Policy uncertainty; Cash holding; Financial constraints; China (search for similar items in EconPapers)
JEL-codes: E61 G32 G38 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:74:y:2021:i:c:s1049007821000476

DOI: 10.1016/j.asieco.2021.101318

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