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

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  • Liu, Yuanyuan
  • Li, Jing
  • Liu, Guanchun
  • Lee, Chien-Chiang

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.

Suggested Citation

  • Liu, Yuanyuan & Li, Jing & Liu, Guanchun & Lee, Chien-Chiang, 2021. "Economic policy uncertainty and firm’s cash holding in China: The key role of asset reversibility," Journal of Asian Economics, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:asieco:v:74:y:2021:i:c:s1049007821000476
    DOI: 10.1016/j.asieco.2021.101318
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    More about this item

    Keywords

    Asset reversibility; Policy uncertainty; Cash holding; Financial constraints; China;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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