Economic Policy Uncertainty And Corporate Cash Holdings

We find that economic policy uncertainty is positively related to cash holdings. This positive relation is attributed to financial constraints that emerge as a new and dominating channel through which policy uncertainty affects corporate financing policies. Neither a delay in investment nor a reduction of the disciplining effect from M&A activities explains this positive relation. Increasing cash holdings during the period of high policy uncertainty contributes to firm excess returns and mitigates the negative impact of policy uncertainty on investment