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

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  • Tenkir Seifu Legesse
  • Haifeng Guo
  • Ying Wang
  • Jiqiang Tang
  • Zhen Wu

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.

Suggested Citation

  • Tenkir Seifu Legesse & Haifeng Guo & Ying Wang & Jiqiang Tang & Zhen Wu, 2023. "The impact of economic policy uncertainty and financial development on the sensitivity of corporate cash holding to cash flows," Applied Economics, Taylor & Francis Journals, vol. 55(32), pages 3728-3746, July.
    • Handle: RePEc:taf:applec:v:55:y:2023:i:32:p:3728-3746
    DOI: 10.1080/00036846.2022.2117781
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    Cited by:

    1. Huang, Xiaowei & He, Chenyu & Zhang, Man, 2024. "Economic policy uncertainty and capital flows' tail risk in China," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).

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