The Effect of Economic Policy Uncertainty on Corporate Cash Holdings

Economic Policy Uncertainty plays a significant role in shaping corporate cash management strategies, with firms often adopting a more conservative approach during periods of heightened uncertainty to safeguard their financial stability. In uncertain environments, firms may prefer to maintain higher cash balances to mitigate risks associated with fluctuating market conditions and unforeseen policy changes. This study explores the effects of economic policy uncertainty (EPU), firm size, and debt-equity ratio on corporate cash holdings using a panel dataset of 440 observations from 40 firms over a 10-year period. Employing Ordinary Least Squares (OLS), Fixed Effects, and Random Effects models, the analysis reveals a significant positive relationship between firm size and cash holdings, indicating that larger firms tend to maintain higher cash reserves. Although a positive but statistically insignificant association between EPU and cash holdings suggests that firms may build cash in anticipation of rising uncertainty, no significant effect of the debt-to-equity ratio on cash reserves was identified. Overall, the findings underscore the critical role of firm size and economic conditions in corporate financial management, particularly in the strategic planning of cash reserves.