The impact of institutional quality on firms cash holdings: evidence from an emerging market

Purpose This study investigates how institutional quality (IQ) affects corporate cash holdings (CHs) in Vietnam – an emerging market where institutional frameworks are evolving and increasingly gaining policy attention. It further examines economic uncertainty as a mediating channel in this relationship. Design/methodology/approach This study utilizes a panel dataset comprising 15,461 firm-year observations from 1,558 publicly listed firms in Vietnam over the period 2008–2022. We employ the fixed effects (FE) regression models to estimate the impact of IQ on corporate CHs. The analysis is further extended to explore the role of economic uncertainty in this relationship. Findings The results indicate that higher IQ significantly reduces corporate CHs, primarily by lowering firms’ precautionary demand for cash. In addition, the study finds an inverse relationship between IQ and economic uncertainty, alongside a positive relationship between economic uncertainty and corporate CHs. These findings suggest that part of the effect of IQ on CHs operates through its ability to reduce economic uncertainty, thereby diminishing the need for precautionary cash reserves. Originality/value This study highlights the influence of IQ on one of the most critical corporate decisions – CH – in the context of an emerging economy undergoing active institutional reform. By doing so, it underscores the pivotal role of IQ not only in shaping firms’ financial behavior but also in promoting economic stability, enhancing resource allocation efficiency and supporting the development of a more robust financial system.