Cautious or calculated? State-level policy uncertainty and corporate cash holdings

Using the state-level economic policy uncertainty (SEPU) indices of Baker, Davis, and Levy (2022), we present novel evidence on some determinants and implications of corporate cash holdings under SEPU. We show that firms hold more cash in times of high SEPU, and this behavior persists after controlling for national economic policy uncertainty, financial crises, and presidential and gubernatorial elections. Cross-sectional analysis indicates that although the outcome is less severe for firms with high leverage and dividend payout, it is more pronounced for financially constrained and high-growth firms. We do not find evidence suggesting that politically connected firms hold more cash. Finally, we validate that firms holding more cash during high SEPU demonstrate significantly lower market value in the following year. Taken together, our findings corroborate the agency theory of corporate cash holdings amidst economic uncertainty.