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Policy Uncertainty and Cash Dynamics

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  • Tut, Daniel

Abstract

Why and when do firms deviate from target cash? And why do we observe imperfect adjustment of cash? We postulate and provide evidence that policy uncertainty induces financing frictions and adjustment costs which decelerate the speed of adjustment (SOA) of cash toward target. We find that the effects of policy uncertainty on SOA are higher for firms that operate below target cash than for firms that operate above target cash. Our results suggest that under policy uncertainty shocks, firms deviate from target cash as the expected benefit of deviation is greater than the expected value of approaching the target.

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  • Tut, Daniel, 2021. "Policy Uncertainty and Cash Dynamics," MPRA Paper 107631, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107631
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    Cited by:

    1. Tut, Daniel & Cao, Melanie, 2021. "Capital Reallocation and Firm-Level Productivity Under Political Uncertainty," MPRA Paper 108528, University Library of Munich, Germany.
    2. Zhaobo Zhu & Licheng Sun, 2024. "Economic policy uncertainty and short-term reversals," Post-Print hal-04691597, HAL.

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    More about this item

    Keywords

    Cash; Adjustment Speed; Adjustment Costs; Financing frictions; Economic Policy uncertainty;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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