Soft institutions, hard cash: Societal happiness and corporate cash holdings

Using cross-country data from the World Happiness Report, we examine how societal happiness influences corporate cash holdings across 58 economies spanning 2006–2020. Consistent with the precautionary motive, we document compelling evidence that firms in happier countries hold more cash, especially during the COVID-19 pandemic and among companies that are opaque and having severe agency problems. However, this effect is dampened in jurisdictions with robust institutions and high social capital. We further show that firms in happier countries spend more on R&D and share repurchases, but less on capital expenditures, acquisitions, and dividend payments. Finally, we find that financial constraints and enhanced market liquidity underlie the documented positive relationship between societal happiness and corporate precautionary savings. Overall, our findings underscore the role of societal sentiment as a soft institutional factor shaping corporate financial policy.