Strategic Cash Portfolio Management in the Face of Policy Uncertainty: Evidence from U.S. Firms
Dr. Bektemir Ysmailov, Professor at NUGSB Co-authors: Julian Atanassov, and Gabriele Lattanzio
When Uncertainty Rises, Firms Rethink What “Cash” Means
Corporate cash is often treated as a simple buffer: firms hold more of it when they face greater uncertainty. But cash is not always just cash. Companies can hold liquid resources in different forms, ranging from highly liquid cash-like instruments to riskier marketable securities such as corporate bonds, government securities, and other short-term investments.
This study examines how U.S. firms adjust the composition of their cash portfolios when economic policy uncertainty rises. Using data on public U.S. industrial firms from 1990 to 2024, the paper shows that firms do not merely change how much liquidity they hold. They also change what kind of liquidity they hold.
The main finding is that during periods of heightened policy uncertainty, firms shift their cash portfolios away from riskier marketable securities and toward safer, more liquid assets. A one-standard-deviation increase in policy uncertainty is associated with a 3.1% decline in the marketable-securities share of firms’ cash portfolios relative to the sample mean. This pattern is consistent with a precautionary motive: when the policy environment becomes harder to predict, firms prioritize safety and immediate liquidity over yield.
The effect is especially strong among firms that are more exposed to financing frictions or operating risks. Financially constrained firms, firms with greater external financing needs, firms in highly competitive product markets, and firms with high levels of intangible assets are more likely to reduce their exposure to marketable securities when uncertainty rises. These firms may have fewer options if external financing becomes costly or unavailable, making safe and liquid assets particularly valuable.
At the same time, the paper uncovers a more nuanced mechanism. Policy uncertainty can also lead firms to delay investment. When firms postpone capital expenditures, they may temporarily hold excess liquidity. Some of that liquidity can be allocated to marketable securities, especially when yield spreads are attractive. This means that while precautionary motives dominate on average, an investment-delay channel can partially offset the shift toward cash-like assets.
The findings contribute to a deeper understanding of corporate financial decision-making under uncertainty. They show that managers respond to policy risk not only by adjusting the size of cash holdings, but also by actively managing the risk, liquidity, and return profile of those holdings.
Why it matters
For managers, the study highlights the importance of looking beyond headline cash balances. The composition of liquidity can be just as important as the amount of liquidity a firm holds.
For investors and analysts, the research suggests that changes in firms’ marketable securities holdings may reveal how managers perceive uncertainty, financing risk, and future investment opportunities.
For policymakers, the findings show that policy uncertainty can affect corporate behavior through financial channels, influencing not only investment decisions but also how firms manage internal liquidity.
Key takeaway
When policy uncertainty rises, firms become more cautious in how they manage cash. They shift toward safer and more liquid assets, especially when access to external finance is limited or business risks are high. Corporate cash management is therefore not just about saving more - it is also about saving differently.