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Cautious or calculated? State-level policy uncertainty and corporate cash holdings

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Listed:
  • Alam, Ahmed W.
  • Farjana, Ashupta
  • Houston, Reza
  • Sanchez, Benito

Abstract

Using the state-level economic policy uncertainty (SEPU) indices of Baker, Davis, and Levy (2022), we present novel evidence on some determinants and implications of corporate cash holdings under SEPU. We show that firms hold more cash in times of high SEPU, and this behavior persists after controlling for national economic policy uncertainty, financial crises, and presidential and gubernatorial elections. Cross-sectional analysis indicates that although the outcome is less severe for firms with high leverage and dividend payout, it is more pronounced for financially constrained and high-growth firms. We do not find evidence suggesting that politically connected firms hold more cash. Finally, we validate that firms holding more cash during high SEPU demonstrate significantly lower market value in the following year. Taken together, our findings corroborate the agency theory of corporate cash holdings amidst economic uncertainty.

Suggested Citation

  • Alam, Ahmed W. & Farjana, Ashupta & Houston, Reza & Sanchez, Benito, 2025. "Cautious or calculated? State-level policy uncertainty and corporate cash holdings," Finance Research Letters, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:finlet:v:73:y:2025:i:c:s1544612324017173
    DOI: 10.1016/j.frl.2024.106688
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    More about this item

    Keywords

    State-level economic policy uncertainty; Corporate cash holding; Firm value; Political connection; Agency theory;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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