Economic Policy Uncertainty, State Ownership And Corporate Cash Holdings

Why do firms hold cash? Whether the distribution of corporate liquid assets will be determined simultaneously by firm features and macroeconomic factors? How does macroeconomic uncertainty impact corporate cash holdings? These are very important questions to be answered in the research discipline of corporate finance. On the one hand, cash is the “blood” for a firm and it meets the transaction needs for a firm’s development(Baum et al., 2006); What’s more, cash has adaptive benefits for a firm. A firm can adjust its strategies when it is faced with serious uncertainty and product market competition(Kim and Bettis, 2014). On the other hand, cash policy is not merely affected by these firm features; it is also influenced by macroeconomic factors such as economic policy uncertainty(EPU).In this thesis, we have, taking as a sample the data of China’s listed companies between 2000 and 2013, researched economic policy uncertainty, state ownership and their impacts on corporate cash holdings. We found that economic policy uncertainty is significantly and positively related to corporate cash holdings. The relationship shows that firms, on the whole, will increase their cash holdings out of precautionary motive, which testifies the trade-off theory of corporate cash holdings. Meanwhile, agency conflicts resulted from state ownership will also exert their effects on corporate cash policies. Our test results show that the higher state ownership a firm has the more cash it will hold. The above relationship is much more pronounced in higher-EPU condition. According to this research, the state ownership will have more significant impact on corporate cash holdings when EPU is higher. The coefficient is significantly positive and shows that the uncertain economic environment has offered fertile ground for opportunistic behaviors to take hold in state-owned companies.This study develops literature on the motivation of corporate cash policies, and sheds some lights on the relationship between macroeconomic factors and micro corporate behaviors.