Economic policy uncertainty, managerial perceptions, and corporate cash holdings: A behavioral and institutional perspective

This study explores how managerial perceptions of economic policy uncertainty (EPU) are associated with corporate cash holding strategies, focusing on the mediating role of financing constraints and the moderating effects of audit quality and ownership structure. Drawing on a behavioral finance framework, emphasizing bounded rationality, selective attention, and heuristic-driven decision-making, we construct a novel firm-level measure of perceived EPU using a textual analysis of Chinese A-share non-financial listed firms’ annual reports from 2007 to 2022. The analysis reveals a negative association between perceived EPU and cash holdings, particularly among non-state-owned enterprises (non-SOEs), which face greater financing frictions and weaker institutional support. In contrast, state-owned enterprises (SOEs) exhibit a more muted or counter-cyclical response, consistent with policy-guided investment mandates. Moreover, high-quality external audits appear to moderate the sensitivity of cash policies to perceived uncertainty, reflecting their governance role in reducing information asymmetry. While empirically grounded in China’s unique institutional context, the behavioral and institutional framework developed in this study holds theoretical implications and may serve as a useful lens for examining corporate financial behavior in other emerging or transition economies facing similar conditions of policy volatility and institutional friction.