Economic policy uncertainty and corporate cash holdings

Abstract

This paper examines the impact of Economic Policy Uncertainty (EPU) on the corporate cash holdings using Compustat Global database. The sample includes annual firm-level data through the 23 years period of 1997-2019 from 17 countries. The measurement of EPU is followed from Baker et al. (2016). Using fixed effects model, this paper finds that there is a significantly positive relationship between EPU and corporate cash holdings. Moreover, the positive impact of EPU on cash holdings is stronger for higher leveraged firms, and firms in developing countries. The result is robust when measurement method of yearly EPU index is changed or lagged variables are used. This paper contributes to related literature by showing that the positive impact of EPU on corporate cash holdings persists at international level.