Munich Personal RePEc Archive

Policy Uncertainty and Cash Dynamics

Tut, Daniel (2021): Policy Uncertainty and Cash Dynamics.

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Abstract

Why and when do firms deviate from target cash? And why do we observe imperfect adjustment of cash? We postulate and provide evidence that policy uncertainty induces financing frictions and adjustment costs which decelerate the speed of adjustment (SOA) of cash toward target. We find that the effects of policy uncertainty on SOA are higher for firms that operate below target cash than for firms that operate above target cash. Our results suggest that under policy uncertainty shocks, firms deviate from target cash as the expected benefit of deviation is greater than the expected value of approaching the target.

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