Precaution or agency? Social capital and the valuation of cash holdings under economic policy uncertainty

Purpose This paper examines the impact of social capital on the relationship between economic policy uncertainty (EPU) and the value of corporate cash holdings. Design/methodology/approach Using a large dataset of publicly listed non-financial firms from 64 countries over the period 2007–2023, the study employs several estimation strategies to test the moderating role of social capital in the relationship between EPU and the value of cash holdings. Findings Economic policy uncertainty is associated with a higher value of cash holdings in high-social-capital environments, consistent with precautionary motives. Conversely, in low-social-capital environments, economic policy uncertainty is associated with a lower value of cash holdings, consistent with greater agency concerns. Practical implications The findings carry important implications for managers, investors, and policymakers. Firms operating in low social capital environments should be mindful that holding excess cash under uncertainty may erode firm value due to heightened agency concerns. Investors should factor in the institutional context when assessing corporate cash policies, while policymakers should recognize that strengthening social trust can enhance the effectiveness of corporate liquidity management. Originality/value This study contributes to the literature by showing that social capital helps explain whether precautionary or agency considerations are more prominent in the valuation of cash holdings under economic policy uncertainty.