During periods of heightened economic uncertainty, firms tend to accumulate more cash due to a precautionary motive. Firms belonging to different ownership groups may vary in their access to sources of finance. Consequently, their response to economic uncertainty could differ. We contribute to the literature by studying the differential impact of economic uncertainty, both global and domestic, on the cash holdings of firms across ownership groups.
We create a matched sample of 1,566 firms from the Indian manufacturing sector using Coarsened Exact Matching (CEM). The time period of the study is 2000–2022. We use fixed effects panel regression for the analysis.
We find that the increase in cash holdings of foreign firms is higher than that of other firms when there is greater global economic policy uncertainty. In contrast, for domestic economic policy uncertainty, firms affiliated with business groups increase cash holdings at a higher rate than other firms. Similar finding for firms that are financially constrained suggests that the increase in cash holdings may arise from precautionary motives.
This study enhances our understanding of firm decision-making during times of economic uncertainty. Policy response to economic shocks can be tailored to suit the nature of the uncertainty and the ownership group that requires support.
Our study examines the response of firms belonging to different ownership groups to global and domestic economic uncertainty. Additionally, we analyse financial constraints as a channel for the cash holding behaviour of firms.
