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Economic Policy Uncertainty And Corporate Cash Holdings

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Date

2017

Journal Title

Journal ISSN

Volume Title

Publisher

Te Herenga Waka—Victoria University of Wellington

Abstract

We find that economic policy uncertainty is positively related to cash holdings. This positive relation is attributed to financial constraints that emerge as a new and dominating channel through which policy uncertainty affects corporate financing policies. Neither a delay in investment nor a reduction of the disciplining effect from M&A activities explains this positive relation. Increasing cash holdings during the period of high policy uncertainty contributes to firm excess returns and mitigates the negative impact of policy uncertainty on investment.

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Keywords

Policy uncertainty, cash holdings, cash-cash flow sensitivity, financial constraints, investment

Citation