Consistent with the agency view of cash holdings, we document a strong negative relationship between economic policy uncertainty and corporate cash holdings for non-U.S. firms from 19 countries. Our results are robust to different measures of cash holdings and model specifications and survive after addressing endogeneity. We provide evidence that the decrease in cash holdings is moderated by shareholders’ ability to force managers to disgorge cash that fits consistently within the agency framework. Overall, results suggest that lowering cash holdings help alleviate agency problems in the presence of policy uncertainty and underscore the significance of country attributes in corporate finance.
Mollagholamali, Mohsen and Javadi, Siamak and Al-Thaqeb, Saud, Corporate Cash Holding, Agency Problems and Economic Policy Uncertainty (February 7, 2015). Available at SSRN: https://ssrn.com/abstract=3515025 or http://dx.doi.org/10.2139/ssrn.3515025