The Effect of Policy Uncertainty on Corporate Cash Holdings: Evidence from Taiwan
Author
Abstract
This study examines the effects of policy uncertainty on the corporate propensity to hold cash. Using the presidential election as a proxy for policy uncertainty, we find that firms increase their cash holding ratios up to 0.7% during election years compared with those of nonelection years. Among the different types of firms, young firms, high-tech firms, and low financial flexibility firms are more likely to increase their cash holdings and receive higher value of cash during election years compared with other firms. Different from the effects of the presidential election, firms tend to decrease their cash holdings during county mayor election years. Overall, our results indicate a positive relationship between policy uncertainty and cash holdings, which is in line with the precautionary motive. In contrast, the findings related to county-level policy uncertainty are more consistent with the grabbing hand hypothesis.
