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How Do Geopolitical Risk and Global Trade Shape Corporate Cash Policy?: Evidence From the Financial Crisis of 2008-2009
Abstract
This chapter investigates the influence of geopolitical risk (GPR) and global trade on cash holdings with the existence of the global financial crisis 2008-2009 (GFC) for 11,960 non-financial firms in 18 markets from 2002 to 2017. Findings show that firms in countries with higher GPR and lower trade volume have higher cash balances confirming the predictions of the precautionary motive of cash. The implications of the findings are manifold. Managers should shape their cash policies considering the uncertainties, GPR, and trade level. Investors should consider countries' financial crises and GPR in specifying where and which firms to invest in. Policymakers can reshape the regulations and policies related to holding cash rather than paying dividends not to hurt firms in times of turbulence like the pandemic. Researchers and practitioners should count the macro-specific factors and market turmoil and their influence on cash holding in risky countries. The implications are particularly relevant to the post-pandemic era when exogenous shocks and uncertainties are further expected.
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