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Corporate Financial Policy and the Value of Cash under Uncertainty

Author

Listed:
  • Christopher F. Baum

    (Boston College
    DIW Berlin)

  • Atreya Chakraborty

    (University of Massachusetts-Boston)

  • Boyan Liu

    (Beihang University)

Abstract

In this paper we provide evidence on how firm-specific and macroeconomic uncertainty affects shareholders' valuation of a firm's cash holdings. This extends previous work on this issue by highlighting the importance of the source of uncertainty. Our findings indicate that increases in firm-specific risk generally increase the value of cash while increases in macroeconomic risk generally decrease the value of cash. These findings are robust to alternative definitions of the unexpected change in cash. We extend our analysis to financially constrained and unconstrained firms.

Suggested Citation

  • Christopher F. Baum & Atreya Chakraborty & Boyan Liu, 2016. "Corporate Financial Policy and the Value of Cash under Uncertainty," Boston College Working Papers in Economics 918, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:918
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    References listed on IDEAS

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    Cited by:

    1. Efstathios Magerakis & Ahsan Habib, 2022. "Environmental uncertainty and corporate cash holdings: The moderating role of CEO ability," International Review of Finance, International Review of Finance Ltd., vol. 22(3), pages 402-432, September.
    2. Muhammad Arif Khan & Xuezhi Qin & Khalil Jebran & Abdul Rashid, 2020. "The Sensitivity of Firms’ Investment to Uncertainty and Cash Flow: Evidence From Listed State-Owned Enterprises and Non-State-Owned Enterprises in China," SAGE Open, , vol. 10(1), pages 21582440209, January.
    3. Quader, Syed Manzur, 2023. "The interplay between uncertainty, managerial decision making, and firm value: Evidence from Bangladesh," Journal of Economics and Business, Elsevier, vol. 123(C).
    4. Muhammad Arif Khan & Xuezhi Qin & Khalil Jebran, 2020. "Uncertainty and leverage nexus: does trade credit matter?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(3), pages 355-389, September.
    5. Arif Khan, Muhammad & Qin, Xuezhi & Jebran, Khalil & Ullah, Irfan, 2020. "Uncertainty and R&D investment: Does product market competition matter?," Research in International Business and Finance, Elsevier, vol. 52(C).
    6. Cosmus Karisa Katana & Dr Rashid Fwamba & Dr Tecla Kirwa, 2023. "Cash Control Practices and Financial Efficacy of Manufacturing Firms in Mombasa County of Kenya," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(6), pages 60-71, June.

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    More about this item

    Keywords

    cash holdings; marginal value of cash; macro uncertainty; idiosyncratic uncertainty; financial constraints;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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