Navigating trade policy uncertainty: Conservatism in cash holding and investment

Amidst the escalating attention paid to trade policy uncertainty (TPU), we explore its influence on crucial corporate strategic decisions – cash holdings and investment choices. Using an ordinary least squares regression model to analyse a panel of US non-financial firms, we find that firms adopt conservative cash policies as pure cash holdings increase while cash equivalents decrease in response to heightened trade policy uncertainty. Cross-sectionally, we observe that the positive link between TPU and cash holdings is stronger for firms facing higher product market threats and those that are less vertically integrated. Furthermore, a firm’s long-term strategies are also adversely impacted by TPU, reflected in reduced capital investments and employment growth. Additionally, we show that increased trade policy uncertainty is linked to both reduced incentives for risk-taking by CEOs and an increase in doubtful accounts. This shift in both incentives and firm operational risk may explain why firms change their behaviour in response to TPU. Our study has broad implications that firms may consider adopting effective risk management practices and policymakers could establish monitoring mechanisms for timely adjustments.