Economic policy uncertainty and other determinants of corporate cash holdings of Australian energy companies

Abstract

Purpose This study aims to investigate a new determinant of corporate cash holdings of Australian energy firms: economic policy uncertainty (EPU). Based on two motives for holding cash: precautionary and speculative motives, the authors argue that EPU increases financing constraints or induces firms to postpone investment projects, thereby increasing their cash holdings. The authors examine whether the Australian policy-related economic uncertainty affects cash holdings of Australian energy companies. Design/methodology/approach This research uses a data set of Australian energy firms from 2010 to 2020 and the Australian EPU index, which measures the uncertainty in economic policy, using news coverage of eight major Australian newspapers. To address the potential endogeneity bias and ensure the robustness of the results, three models are used: ordinary least squares, fixed-effects and dynamic generalized method of moments. Findings The authors find that the EPU index has a significant and positive effect on cash holdings, after controlling for firm-specific factors. While firm size and dividend payments have mixed and insignificant effects, other determinants are significant, such as growth opportunities, net working capital, cash flow, cash flow risk, leverage and capital expenditure. The authors also find that the positive effect of EPU on cash holdings is not the manifestation of EPU affecting corporate investments but rather explained by financing constraints. Practical implications The findings have implications for policymakers and regulators in Australia as the uncertainty of their economic policies plays an important role when Australian energy companies determine their cash holding level to manage liquidity risks. Originality/value This study is the first to document EPU index as the new determinant of corporate cash holdings of Australian energy companies. Firms in this sector have a great need of funding and liquidity for their operations and capital-intensive projects. High EPU index induces them to hold more cash to avoid liquidity shocks.

Impact of economic policy uncertainty on financial flexibility before and during the COVID-19 pandemic

“…This result supports H2. The findings suggest that firms will hold more cash during times of high EPU to overcome investment delays and to keep it as a safety net, thus being consistent with prior studies (Trinh et al ., 2022; Feng et al ., 2022). The COVID-19-induced EPU demonstrates varied impacts on debt and cash flexibility.…”

Strengthening Corporate Cash Holdings and Investment Efficiency in the COVID-19 Pandemic: Some Empirical Evidence from Indonesia Emerging Markets

“…By recognizing the importance of conducting comprehensive risk assessments, considering costs, and addressing information asymmetry, companies can strive for improved investment efficiency and align their investment decisions with long-term organizational objectives [43,46,49]. Ongoing research in this field is crucial to enhance our understanding of investment efficiency further and develop strategies to effectively overcome investment distortions in practical settings [56,58].…”

“…It takes a value of 1 if the firm's fiscal year falls within 2019 and 2020, representing the years directly affected by the pandemic [18]. The study focuses on investment efficiency as the dependent variable, representing the firm's investment decisions aimed at achieving an optimal balance without exhibiting either over-investment or under-investment [19,56]. The measurement of investment efficiency in this study is based on a model developed by [20], with the residual derived from the corresponding equation.…”

Faktor-Faktor yang Mempengaruhi Cash Holding Terhadap Perusahaan Manufaktur di Indonesia

“…Literatur-literatur ekonomi dan finance menyebutkan bahwa terdapat tiga motif utama dari memegang kas, yaitu: motif transaksi, perusahaan memegang kas dengan tujuan untuk mengurangi biaya likuiditasi aset ketika kas dibutuhkan dalam waktu yang mendesak; motif berjaga-jaga, yaitu perusahaa memegang uang ekstra untuk menghadapi situasi yang tidak bisa diprediksi sebelumnya yang membutuhkan pengeluaran modal; dan motif keagenan, manajer yang terlatih cenderung memegang kas daripada membayarkannya ke pemegang saham ketika perusahaan mempunyai peluang investasi yang buruk dan menggunakan kas yang menganggur tersebut untuk mendapatkan keuntungan bagi diri mereka sendiri. Kaitannya dengan perusahaan, cash holding merupakan bagian terpenting bagi perusahaan (Bates et al, no date) Penelitian sebelumnya telah mendokumentasikan faktor-faktor penentu kepemilikan kas perusahaan yang terdiri dari: firm size, growth opportunities, cash flow, cash flow risk, leverage, capital expenditure and dividend payments (Trinh, Nguyen and Nghiem, 2022). Tujuan penelitian adalah untuk mengetahui Faktor-faktor yang mempengaruhi Cash Holding Terhadap Perusahaan Manufaktur di Indonesia.…”