The impact of economic policy uncertainty and financial development on the sensitivity of corporate cash holding to cash flows

Tenkir Seifu Legesse, Haifeng Guo, Ying Wang, Jiqiang Tang and Zhen Wu

Applied Economics, 2023, vol. 55, issue 32, 3728-3746

Abstract: The paper examines how economic policy uncertainty and financial development affect a firm’s cash-holding policy before and after the global financial crisis. Using Chinese nonfinancial firm data from 1997 to 2018, we obtain three main findings. First, economic policy uncertainty increases corporate cash holdings and its sensitivity to operating cash flows. Second, financial institution and market developments reduce corporate cash-holdings’ cash flow sensitivity. Third, the impact of economic policy uncertainty on corporate cash-holdings’ sensitivity to operating cash flows decreases with financial development. Firms adjust their cash-holding policy in response to changes in economic policy uncertainty and financial development, indicating that macroeconomic factors determine the precautionary motive for holding cash.

Date: 2023
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DOI: 10.1080/00036846.2022.2117781

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