How Do Macroeconomic Cycles and Government Policies Influence Cash Holdings? Evidence from Listed Firms in China

Abstract

Cash holdings are vital for a firm’s resilience and ability to capitalize on investment opportunities amid economic fluctuations. In this study, the complex relationship between macroeconomic cycles, government policies, and the cash holdings of Chinese listed firms is investigated. By analyzing data from Shanghai and Shenzhen A-share listed firms from 2004 to 2019, this research uncovers the individual and combined effects of economic cycles and monetary policies on corporate cash management. Key findings include the following: (1) A significant negative correlation between cash holdings and economic cycle volatility indicates that firms tend to increase cash holdings during periods of instability and reduce them during economic stability. (2) There is a strong negative relationship between restrictive monetary policy and cash holdings, suggesting that firms accumulate more cash to safeguard against tighter financial conditions. (3) The interplay between economic policies and business cycles reveals that during recessions, restrictive monetary policy increases cash holdings, while economic policy uncertainty reduces them. In contrast, during economic prosperity, monetary policy has a minimal impact on cash holdings. These insights emphasize the need for firms to integrate both economic cycles and policy environments into their cash management strategies. The findings offer valuable guidance for policymakers and business leaders aiming to enhance financial stability and optimize cash holdings across different economic conditions.