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Excess liquidity and risk: How economic policy uncertainty shapes corporate decisions post-crisis?

Author

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  • Nguyen, Thanh Cong
  • Nguyen, Thai Vu Hong
  • Schinckus, Christophe
  • Chu, Thanh Tuan

Abstract

This study explores the relationship between excess liquidity and corporate risk-taking, with a focus on how economic policy uncertainty (EPU) moderates this dynamic. Using an SGMM estimator and an unbalanced panel dataset from 33 countries spanning 2000 to 2019, the findings reveal that excess liquidity significantly increases corporate risk-taking through the mechanisms of managerial discretion and overconfidence. However, heightened EPU weakens this positive effect, encouraging more cautious decision-making. The study further highlights that enterprises in countries profoundly impacted by the Global Financial Crisis exhibit heightened prudence under high uncertainty. By incorporating EPU as a critical moderating factor, this research provides novel insights into the interplay between liquidity, uncertainty, and corporate risk behavior, offering a fresh perspective on post-crisis financial dynamics and risk management in the business sector.

Suggested Citation

  • Nguyen, Thanh Cong & Nguyen, Thai Vu Hong & Schinckus, Christophe & Chu, Thanh Tuan, 2025. "Excess liquidity and risk: How economic policy uncertainty shapes corporate decisions post-crisis?," Finance Research Letters, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:finlet:v:83:y:2025:i:c:s1544612325009973
    DOI: 10.1016/j.frl.2025.107739
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    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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