News tone and cash holdings in European firms

Purpose The authors aim to examine the relationship between the tone of news media items and cash holdings based on a multi-theoretical analysis. Design/methodology/approach Using a sample of non-financial firms listed in the STOXX Europe 600 index (2014–2023) and, to enhance the robustness of the results obtained, the study uses several econometric models, such as GMM, 2SLS and Heckman models. Findings The results evidence a positive relationship between the publication of positive news related to the firm and cash holdings, supporting the argument that positive news mitigates agency conflicts associated with cash reserves. Furthermore, the authors observe that the publication of negative news has a positive impact on cash levels, given that greater transparency in the negative actions of internal agents limits management discretion and the ability of firms to obtain external financing, as it increases the costs of such financing. Research limitations/implications The results highlight the role of the tone of new items as drivers of cash holdings. Originality/value To the best of the authors’ knowledge, this is the first study to analyse the tone of news items-cash holding relationship using an international sample. Therefore, the authors expand knowledge about the media’s role in determining financial policies. Finally, the authors extend understanding of how the media act as a mechanism to legitimise firms by analysing whether media scrutiny affects financial decisions that seek to meet stakeholder demands.