Corporate cash holdings, agency problems, and economic policy uncertainty

Javadi, Siamak; Mollagholamali, Mohsen; Nejadmalayeri, Ali; Al‐Thaqeb, Saud Asaad

doi:10.1016/j.irfa.2021.101859

Cited by 41 publications

(30 citation statements)

References 82 publications

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“…We believe that this difference occurs because the company's motive to hold cash when uncertainty increases are divided into two. The first is the precautionary motive and the second is caused by the agency problem (Javadi et al, 2021). These two motives show contradictory results to each other.…”

Section: Discussionmentioning

confidence: 98%

“…Under high uncertainty, there is a gap in the information held by external parties and managers about the company. Moreover, a higher information asymmetry problem will increase a firm's agency problems (Javadi et al, 2021). Excess cash holding can cause managers to take detrimental actions such as overinvestment or pursuing personal gain.…”

Section: Discussionmentioning

confidence: 99%

“…Excess cash holding can cause managers to take detrimental actions such as overinvestment or pursuing personal gain. To reduce agency problems, external investors will request companies to reduce cash so that managers experience limitations in using company funding which ultimately builds managerial discipline to use the capital market to fund investments under the supervision of external parties (Javadi et al, 2021). Based on this explanation, even amid increased variability of uncertainty, uncertainty will decrease a firm's cash holding yields.…”

Section: Discussionmentioning

confidence: 99%

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Uncertainty Volatility, Investment, And Cash Holding In ASEAN Countries

Roring

Juliana²

2022

Jurnal Akuntansi

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This study aims to show the effect of uncertainty on firms’ corporate investment and cash holding in five ASEAN countries, namely Malaysia, Indonesia, Singapore, Thailand, and Vietnam. The study was conducted using data from non-financial public listed firms in these five ASEAN countries during the 2006 to 2020 period. The uncertainty volatility is measured using the standard deviation of the economic policy uncertainty index. The results of this study find that uncertainty volatility increases corporate investment and decreases corporate cash holding. This result indicates that high uncertainty economic condition cause firms to invest to reduce information asymmetry by giving signals to external investors through investment, and as result, it reduces the corporate cash holdings. Moreover, we also find that uncertainty volatility is more economically significant than Economic Policy Uncertainty it self. It is possible that uncertainty volatility can better capture the real uncertain condition in the economy.

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Section: Discussionmentioning

confidence: 98%

Section: Discussionmentioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

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Uncertainty Volatility, Investment, And Cash Holding In ASEAN Countries

Roring

Juliana²

2022

Jurnal Akuntansi

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“…By contrast, shareholders prefer dividends over retained earnings to reduce excessive cash under managers' control. According to Javadi et al (2021), lower cash holding in the face of higher policy uncertainty disciplines the managers to be more prudent in the use of the firm's resources. In this context, managers will tap into capital markets to fund future investments, which will expose them to subsequent monitoring by the market.…”

Section: Introductionmentioning

confidence: 99%

“…As argued by Attig et al (2021), firms are likely to be more vulnerable to agency problems of FCF during high EPU and GPR periods because these periods are associated with decreased real economic activities (Baker et al, 2016) and hinders investment opportunities (Javadi et al, 2021). This in turn will increase cash reserves, which can be easily expropriated by mangers and turned into private benefits.…”

Section: Introductionmentioning

confidence: 99%

Economic policy uncertainty, geopolitical risk and cash holdings: evidence from Saudi Arabia

Guizani

Talbi²,

Abdalkrim³

2023

AGJSR

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PurposeThis study aims to investigate the influence of economic policy uncertainty (EPU) and geopolitical risk (GPR) on corporate cash holding level and speed of adjustment (SOA) in one of the most important emerging markets in the Middle East and North Africa, Saudi Arabia. It also investigates whether Shariah-compliance as well as financial constraints affect the relationship between both EPU and GPR and corporate cash holdings.Design/methodology/approachThe study employs GMM regression considering a sample of 140 nonfinancial firms drawn from the Saudi stock market over the period 2002 to 2019.FindingsThe authors find evidence in support of the precautionary motive hypothesis. Facing costly external financing induced by economic policy-related uncertainty and geopolitical tension, Saudi firms tend to accumulate cash as a buffer against negative shocks to their cash flows. The results also show that the positive impact of EPU and GPR on the level of cash holding is less pronounced in Shariah-compliant firms, whereas it is more pronounced in more financially constrained firms. Evidence also reveals that the estimated adjustment coefficients show that Saudi firms adjust more quickly toward their target cash ratio in periods of high economic instability and geopolitical risks.Practical implicationsThis study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering factors measured at the country level. More specifically, managers should pay more attention to periods of heightened uncertainties and geopolitical tensions in which the availability of funds is reduced. For policymakers and regulators, this study may be useful in assessing the effect of economic instability on firm’s cash holding decision. Therefore, in an effort to increase the supply of external financing available to firms, policymakers may devise investment friendly environment by controlling country-specific factors.Originality/valueThis paper shows how EPU and GPR as institutional environment factors affect cash holding decision in an oil-rich country.

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