Tóm Tắt (Eng) Investment-Cash Flow Sensitivity Under Monetary Policy Surprises In Vietnam Not All Firms Are The Same.pdf

Building on this perspective, the thesis investigates whether firms perceive unexpected monetary expansion as an opportunity to ease capital constraints and increase fixed investment bey

Ministry of Education and Training

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

To Cong Nguyen Bao

(Tô Công Nguyên Bảo, in Vietnamese)

INVESTMENT-CASH FLOW SENSITIVITY UNDER MONETARY POLICY SURPRISES IN VIETNAM:

NOT ALL FIRMS ARE THE SAME

Ho Chi Minh City - 2025

The thesis is carried out at:

UNIVERSITY OF ECONOMICS HO CHI MINH CITY (UEH) Supervisor:

Prof Dr NGUYEN KHAC QUOC BAO

Reviewer 1 : Reviewer 2 : Reviewer 3 :

The thesis will be defended at the Doctorate Thesis Committee

of Examiners of the University of Economics Ho Chi Minh City at on The thesis can be referred at the library:

Selected Publications

Peer Reviewed Journals

1 Unexpected money growth, nonfinancial firms as large shareholders and

investment-cash flow relationship: Evidence from Vietnam｜2022｜Journal of

Economics and Business, 119, 106054 (ABS 2｜ABDC: B) —

Corresponding author.

2 Uncertainty and cash holdings: The moderating role of political connections｜

2024｜International Journal of Managerial Finance, 20(5) (ABS 2｜

ABDC: A) — Corresponding author.

3 Risk, return gap, and investment choice of Vietnamese firms: Impacts from

global uncertainty and monetary policy｜2024｜Journal of Asian Business

and Economic Studies (in Vietnamese), 35(6) — Corresponding author.

Relevant Publications and Projects

1 Science in monetary policy and approaches for Vietnam｜2024｜ Asia-Pacific

Economic Review (in Vietnamese), 6, 67-70 — Corresponding author.

2 Risk, return gap, and investment choice of Vietnamese firms: Impacts from

global uncertainty and monetary policy｜2024｜ Project managed by the

UEH University (in Vietnamese) — Project manager Status: Completed

3 The impact of digital transformation on the firm performance in Vietnam｜2024

｜ Project managed by the Vietnam Ministry of Education and

Training (in Vietnamese) — Member Status: Completed.

4 Post-COVID-19 global uncertainty and the adaptation strategies of Vietnamese

firms｜2024｜ Project managed by the UEH University (in Vietnamese)

— Member Status: Completed.

Chapter 1 Introduction

1.1 Motivation

A core question in corporate finance is how firms determine their investments under what we simply don’t know as surprises in policies This topic has been hotly debated over the past decades, with each period revealing different discoveries and new factors that have changed the way firms invest Studies on corporate investment published in

the Journal of Corporate Finance and Journal of Financial Economics over the past 10 years

have also demonstrated this trend (e.g., Chen & Chen, 2012; O’Toole et al., 2016; Larkin

et al., 2018; Wang, 2023; Brick et al., 2024) Chen and Chen (2012) find that cash flow sensitivity (ICF) not only declined but effectively disappeared in the U.S., even during the 2007–2009 credit crunch They argue that this trend cannot be fully explained

investment-by factors such as changes in sample composition, measurement errors in Tobin’s Q, the emergence of new financing channels, the influence of R&D and intangible assets, or corporate governance effects Larkin et al (2018) analyze ICF across international markets, finding that while it remains stable in poorer countries, it has significantly declined in wealthier nations Their findings suggest that rising global economic wealth and reduced financial constraints on firms have contributed to this trend in developed countries, unlike in poorer nations

The thesis questions why this topic remains underexplored in developing economies like Vietnam, where monetary policy is often multi-targeted Such an approach increases the likelihood of monetary policy surprises (MPS) due to the simultaneous pursuit of objectives such as stabilizing inflation, supporting economic growth, maintaining exchange rate stability, and ensuring financial system resilience Building on this perspective, the thesis investigates whether firms perceive unexpected monetary expansion as an opportunity to ease capital constraints and increase fixed investment beyond their original plans, and whether this, in turn, leads to the disappearance of investment–cash flow sensitivity (ICF) The thesis explores this issue in the unique context of Vietnam, which exhibits four key characteristics: (1) a multi-instrument monetary framework; (2) a shallow capital market that is heavily reliant on the banking system; (3) the dominant role of state capital in the economy; and (4) a transitional economic structure This financial landscape can lead to asymmetrical responses to monetary surprises These traits make Vietnam an ideal setting to examine how MPS influence investment decisions and internal financing constraints in an emerging market with underdeveloped equity and bond markets

This thesis examines to address: (1) whether Vietnamese firms increase investment

in response to MPS; and (2) whether ICF weakens or disappears as MPS rises When governments implement unexpected expansionary policies, improving external capital access As a result, firms may invest more, reducing reliance on internal cash flow State capital plays an important role in this relationship State-owned enterprises (SOEs), constrained by rigid investment frameworks and government oversight, rely heavily on internal cash flow and exhibit lower responsiveness to monetary policy surprises Since SOEs benefit from favorable borrowing conditions and government backing, they are less dependent on unexpected monetary expansions for external funding (Gulen & Ion, 2016; Gao et al., 2019; Li et al., 2020) In contrast, foreign-owned enterprises, driven by profit maximization, are more likely to leverage unexpected monetary expansion to access external funding at lower costs, reducing their dependence on internal cash flow Finally, the thesis explores firms' liquidity management adjustments in response to monetary policy surprises Firms may allocate more capital to fixed assets or increase cash holdings, adopting a "wait-and-see" approach, which is in line with the real option theory The thesis also examines whether firms reduce short- and long-term financial investments to leverage unexpected monetary expansions

(3) The third objective is to explore the asymmetric effects of monetary policy surprises

by investigating whether Vietnamese firms prefer to hold more cash and reduce financial investments when monetary policy surprises increase

1.3 Research questions

(1) How do Vietnamese firms respond to increasing monetary policy surprises in terms of fixed investment, and does ICF weaken or disappear under such conditions?

(2) How does the ICF of Vietnamese firms differ between state-owned and owned enterprises when monetary policy surprises increase?

foreign-(3) Do Vietnamese firms adopt a "wait-and-see" approach by holding more cash and reducing financial investments in response to monetary policy surprises?

1.4 Delimitations of scope and key assumptions

The thesis focuses on a specific sample of Vietnamese listed firms, deliberately excluding financial institutions such as banks, insurance companies, and funds The sample includes non-financial listed firms from the Ho Chi Minh City Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX) over a period of 14 years, from 2010 to 2023 The scope of the research is centered on key themes such as monetary policy surprises, ICF, cash holdings, financial investments, and other related corporate finance issues These delimitations and assumptions help narrow the focus of the study, ensuring that the findings are pertinent to the specified context of Vietnamese non-financial firms The thesis focuses solely on proposing recommendations from the researcher's perspective

on corporate governance and policy management, based strictly on its findings while avoiding overstatements

1.5 Methodology

In this thesis, the author employs a quantitative approach to meet the research objectives The thesis employs a panel data estimation methodology, utilizing multi-way fixed effects (FE) to account for variations across time, industry, and province To mitigate heteroscedasticity and clustered observations, robust standard errors at the firm level are applied, in accordance with Petersen (2008) An instrumental variables (IVs) approach through two-stage least squares (2SLS) estimation is also implemented to address endogeneity concerns To enhance robustness, the System-GMM (S.GMM) approach is utilized to control for endogeneity and unobservable heterogeneity related

to fixed firm effects

1.6 Research process

§ Step 1: The thesis develops hypotheses and establishes research models To

accomplish this, the author clearly defines the research objectives and reviews relevant theoretical frameworks and empirical studies

§ Step 2: The thesis outlines and proposes methods to measure variables within the

research models This serves as the foundation for selecting the research sample and identifying data sources to process and calculate the variables

§ Step 3: The thesis applies econometric techniques and methods to provide

statistical evidence, which forms the basis for analysis and recommendations related to the research topic

1.7 Contributions of the thesis

First, to my knowledge, this study is among the first to investigate the impact of MPS

on ICF, which captures the "unexpected component" of monetary policy changes Unlike the widely used economic policy uncertainty index developed by Baker et al (2016), which does not distinguish between different types of policy uncertainty Economic policy uncertainty is a broad and often ambiguous measure that fails to differentiate among monetary, fiscal, and other policy types We specifically focuse on a more targeted measure—MPS—which captures unexpected changes in monetary policy As a result, MPS may have a different impact—either positive or negative—on corporate investment compared to economic policy uncertainty MPS can facilitate access to external capital, prompting firms to expand investments and reduce dependence on internal cash flow, weakening or eliminating ICF

Second, this thesis contributes to both the theoretical and practical understanding of the

heterogeneity in ICF among Vietnamese firms SOEs often benefit from government guarantees and preferential access to external financing, making them less sensitive to monetary policy shifts (Gao et al., 2019; O’Toole et al., 2016) The findings show that ICF still exists in SOEs even when MPS This aligns with the pecking order theory Furthermore, SOEs' investment plans are typically rigid and difficult to adjust in response

to monetary policy surprises SOEs may not need to rely on unexpected money supply growth for external funding, as they already benefit from favorable borrowing conditions under normal circumstances Their political connections and implicit government guarantees allow them to secure long-term bank loans with high credit ratings, shaping the transmission of monetary policy (Gulen & Ion, 2016; Gao et al., 2019; Li et al., 2020) In constarct, firms with foreign investors tend to have better governance structures and adopt more cautious investment strategies, potentially leading to lower capital expenditures (Gutiérrez & Philippon, 2018; Harford et al., 2018) This suggests that non-state-owned and foreign-owned enterprises can leverage unexpected money supply growth to reduce their reliance on internal cash flows, as access to external funding through the commercial banking system becomes easier with lower interest rates

Third, this thesis explores the relationship between cash holdings and monetary

policy surprises, particularly in countries with weak investor protections where controlling shareholders may extract private benefits, resulting in higher cash reserves (Pinkowitz et al., 2006) In this context, the thesis confirms a positive link between MPS and corporate cash holdings, as firms may delay investment while awaiting optimal timing amid potential policy shifts The study also investigates whether, during such periods, firms reduce short- and long-term financial investments to capitalize on

unexpected money supply growth This behavior may stem from lower interest rates in the capital market, which raise the opportunity cost and reduce the attractiveness of financial investments (Sekandary & Bask, 2023) Consequently, firms may reallocate capital from financial assets toward fixed asset projects or increase cash reserves, adopting a “wait-and-see” approach However, prior research has not explored whether easier access to external capital enables firms to reallocate funds in this way The findings confirm that as MPS increases, firms shift investments away from financial assets toward long-term investment plans

1.8 Organization of the thesis

Chapter 1 : Introduction

Chapter 2 : Theoretical Framework and Literature Review

Chapter 3 : Methodology

Chapter 4 : Results and Discussions

Chapter 5 : Concluding Remarks and Recommendations

Chapter 2 Theoretical Framework

and Literature Review

2.1 Theoretical framework

Figure 2.1 Theoretical framework

Source: Author's own work

2.1.1 Theories of corporate investment

Fisher (1930) and Keynes (1936) proposed that corporate firms do not invest until future cash flows, adjusted for NPV, equal zero Therefore, NPV is a critical factor in making physical investment decisions Later, Markowitz (1952) expanded his concept by emphasizing additional key factors for portfolio selection in investments, including discounted cash flow, payback period, and internal rate of return Since then, various theories have emerged to explain investment behavior, each outlining the assumptions that guide investment decisions There are convincing examples of these theories in action The economic drivers—such as cash flow, taxes, information asymmetry, agency costs, financial distress, and external shocks—are clearly reflected in investment tactics However, none of the theories provides a comprehensive explanation of investment strategy, as they are plausible only as conditional frameworks

Cash flow Sensitivity (ICF)

Investment-Heterogeneous Responses Monetary Policy Surprises (MPS)

Trade-off theory

Neoclassical theory The internal funds theory

Accelerator theory Pecking order theory

Tobin’s Q theory

Agency theory Modigliani-Miller theorem Real options theory

1 State-owned enterprises

2 Foreign ownership

1 Do firms prefer to hold more cash?

2 Do firms decrease financial investments?

Unveiling the Asymmetric Effect

1 Unexpected money growth

2 Random shocks to money growth

Modigliani and Miller (1958) argue that under perfect market conditions, a firm’s financing policy does not affect its investment decisions In this idealized setting, internal and external funds are perfect substitutes, implying that investment decisions depend solely on the availability of profitable opportunities However, in practice, financial market imperfections create disparities between the costs of internal and external financing, leading to potential distortions in investment behavior Asymmetric information is one such imperfection Myers and Majluf (1984) suggest that, due to information asymmetries, external financing becomes more expensive, prompting firms to rely more heavily on internally generated funds This underpins the pecking order theory, which posits a financing hierarchy—internal funds are used first, followed by debt, and then equity—resulting in a positive sensitivity of investment to cash flow

Conversely, agency theory offers a different perspective Jensen (1986) and Shin and Stulz (1998) contend that free cash flow may encourage managerial opportunism, particularly in firms with limited growth opportunities Rather than distributing excess cash to shareholders, managers may overinvest in negative net present value projects, personal perks, or unrelated diversification, thereby increasing agency costs (Meckling & Jensen, 1976) The availability of internal funds can thus reduce dependence on external financing, weakening market discipline and potentially leading to inefficient overinvestment This agency-driven overinvestment also manifests as a positive relationship between investment and cash flow, albeit for different reasons than under the pecking order theory Financial market imperfections, such as informational asymmetries, can therefore widen the cost gap between internal and external capital (Myers, 1984), reinforcing firms’ reliance on internal resources Cleary et al (2007) develop a theoretical model showing that firms facing significant imperfections exhibit stronger investment–cash flow sensitivity

Agency problems, a form of market imperfection, can further amplify firms’ reliance

on internal funds Jensen’s (1986) free cash flow hypothesis suggests that when profitable growth opportunities are scarce and internal funds are abundant, managers may prioritize personal agendas over shareholder value, resulting in inefficient overinvestment Several empirical studies affirm the agency perspective For example, Degryse and De Jong (2006) find that strong bank–firm relationships can curb overinvestment through the disciplinary role of debt, thereby reducing investment–cash flow sensitivity Richardson (2006) shows that firms with stronger boards exhibit lower sensitivity, suggesting more effective oversight Similarly, Mueller and Peev (2007) argue that weak investor protection fosters managerial discretion, increasing the likelihood of overinvestment Using a natural experiment, (Andrén & Jankensgård, 2015) demonstrate

that financially unconstrained firms face higher sensitivity due to intensified agency problems linked to excess cash holdings

2.1.2 Institutional framework for Vietnam’s monetary policy transmission to corporate investment

The 2010 Law on the SBV defines the decision-making authority for national monetary policy The National Assembly sets the annual inflation target, oversees monetary policy implementation, and makes decisions related to the consumer price index The President holds the authority to negotiate and sign international treaties in the monetary and banking sectors on behalf of Vietnam Meanwhile, the Government proposes the annual inflation target for the National Assembly’s approval The Prime Minister and the Governor of the SBV are responsible for implementing policy tools and management measures to achieve national monetary policy objectives in line with government regulations As stipulated in the 2010 Law on the State Bank of Vietnam (SBV), the SBV Governor is responsible for selecting and implementing monetary policy tools These tools include refinancing, interest rates, exchange rates, required reserves, open market operations, and other measures as prescribed by the government

Monetary policy adjustments can have a direct impact on external financing through various transmission mechanisms Traditional theories of this process highlight key channels, including interest rates, credit availability, and asset prices (Bernanke & Blinder, 1988; Meltzer, 1995; Bernanke & Gertler, 1995; Mishkin, 1995) When the interest rate channel is in effect, a decrease in marginal interest rates should lead to increased investment If the asset price channel is dominant, an increase in Tobin’s Q is expected to coincide with rising investment levels In macroeconomic literature, examining the influence of monetary policy on aggregate investment has been a long-standing tradition, with key contributions from Bernanke and Gertler (2000), Ottonello and Winberry (2020), and Koby and Wolf (2020) Classical theories propose that monetary policy impacts the real economy through interest rate and credit channels Changes in interest rates directly affect firms' financing costs, with monetary easing reducing borrowing costs and tightening increasing them, thereby influencing external financing decisions

The credit channel, in contrast, influences the marginal cost and availability of financing by impacting firms' balance sheets and shaping how the credit market evaluates their financial health Both channels play a crucial role in corporate investment decisions Morck et al (2013) found that firms scale back investment when banks tighten credit supply Similarly, De Pooter et al (2021) emphasize that monetary policy uncertainty influences how monetary policy surprises are transmitted to financial markets and firms Given that Vietnam's economy follows an investment-led growth

model, understanding the impact of monetary policies on corporate investment has become a crucial and timely issue

2.2 Monetary policy surprises and investment-cash flow sensitivity

2.2.1 Monetary policy surprises and corporate investment

One of the earliest discussions regarding the modern concept of uncertainty as surprises can be traced back to Knight (1921) He introduced a distinction between uncertainty and risk, highlighting situations where knowledge of probability distributions is incomplete or limited Keynes (1937) echoed this sentiment in his famous assertion: "We simply don’t know." Most theoretical models emphasize real options theory, thoroughly examined by Dixit and Pindyck (1994) The Oi-Hartman-Abel framework, derived from the works of Oi (1961), Hartman (1972), and Abel (1983), proposes that when profit functions are convex, increased risk can enhance expected profits by assigning greater probability weight to price fluctuations The growth options mechanism indicates that heightened risk stimulates investment activity by raising expected profits Conversely, risk aversion theory links increased uncertainty to a higher risk premium, which raises financing costs and adversely affects investment decisions Real options theory, developed by scholars such as Black and Scholes (1973), Cox and Ross (1976), and Bernanke (1983), assumes that investment projects occur under conditions of irreversibility, allowing investors to delay projects as new information emerges over time

Monetary policy has a significant impact on corporate investment decisions (Morck et al., 2013) and financing decisions (Kashyap & Stein, 1994) A common consensus from empirical studies has shown that expansionary (tightening) monetary policies may lead to

an increase (decrease) in credit supply, resulting in a decrease (increase) in interest rates, as well as an upward (downward) trend in investment and consumption in the economy (Kashyap & Stein, 1994) The response varies between state-owned and private firms, and across different firm sizes (Tang et al., 2022) The impact is more tied to access to external finance than to investment opportunities Ma and Wang (2024) provide strong evidence that firms increase their innovative activities in response to monetary policy shocks Monetary shocks represent the exogenous component of policy, reflecting unexpected changes (Romer & Romer, 2004; Ramey, 2016) Formulating an identification strategy for MPS is a challenging task Some studies, particularly in micro-level empirical research, utilize the M2 growth rate or even residuals from reduced VAR or recursive VAR models to analyze monetary policy effects (e.g., Jiang et al., 2024; Lu et al., 2023; Yang et al., 2017) In Vietnam, Nguyen et al (2022) analyze the impact of unexpected money growth on firm-level investment, mirroring the effects of monetary tightening

The study finds that higher cash flows enhance investment, particularly for firms facing external financial constraints Additionally, non-financial firm ownership weakens the investment impact of monetary tightening, emphasizing the role of cash flow and ownership characteristics Building on this literature, this study aims to identify MPS and examine their effects on corporate investment Accordingly, a surprise increase in monetary policy indicates an unanticipated money supply growth strategy The key question is whether firms will perceive this as an expansionary monetary policy and take advantage of easier access to external capital and lower capital costs to expand fixed investment (also known as capital expenditure) beyond their original plans Accordingly, the research puts forward the first hypothesis:

H1 Vietnamese firms expand fixed investment when monetary policy surprises increase

2.2.2 Monetary policy surprises, cash flow, and corporate investment

For decades, ICF has been a widely studied topic among scholars worldwide (Kaplan

& Zingales, 1997; Fazzari et al., 1988; Firth et al., 2012), yet research on ICF under MPS remains under-explored MPS may influence corporate investment behavior, particularly through unexpected money supply growth, which can facilitate easier access to external capital and encourage firms to expand investment beyond expectations In this context, firms may reduce their reliance on internal funding (e.g., cash flow) Modigliani and Miller (1958) suggest that in an imperfect market, the high cost of external financing deters firms from relying on it to fund investment opportunities, signaling the presence of external financial constraints Following-up studies concur, indicating that these elevated capital costs stem from information asymmetry, which compels firms to prioritize internal financing instead (Arslan et al., 2006; Myers & Majluf, 1984) Such shocks generally have negative impacts, leading to a decline in economic growth

However, the key question is how the government responds through monetary policy when these shocks occur Does the immediate implementation of expansionary monetary policy and other measures effectively mitigate the situation? Policymakers aim to stimulate demand and encourage firm investment to support economic recovery Based on the pecking order theory proposed by Myers and Majluf (1984), firms typically prioritize using internal resources, such as retained earnings, to fulfill their capital requirements Consequently, to boost corporate investment, firms tend to heavily depend on internal cash flow (Frank & Goyal, 2008) This reliance results in a positive correlation between cash flow and corporate investment (Fazzari et al., 1988)

What accounts for the puzzling decline in ICF observed over the past five decades?

Allayannis and Mozumdar (2004) documented a decline in ICF during 1977-1996 Brown and Petersen (2009) link the weakening relationship from 1970 to 2006 to the growing significance of public equity and the rising proportion of R&D in total investment Chen

and Chen (2012) further find that this sensitivity not only declined but effectively disappeared in the U.S., even during the 2007–2009 credit crunch Larkin et al (2018) analyze ICF across international markets, finding it stable in poorer countries but significantly declining in wealthier nations This trend is attributed to increased global economic wealth and reduced financial constraints at the firm level in developed countries The study emphasizes that access to external finance, particularly equity financing, plays a crucial role in how a country’s level of development affects the ICF Throughout history, ICF has fluctuated, sometimes appearing strong and at other times weak Explaining this phenomenon requires considering different economic contexts and time periods Notably, unexpected money supply growth can facilitate easier access to external capital, prompting firms to expand investment beyond initial expectations In this scenario, firms may reduce their dependence on internal cash flow Based on this reasoning, the study presents the second hypothesis:

H2 The investment-cash flow sensitivity among Vietnamese firms weakens or disappears

when monetary policy surprises increase

2.3 Heterogeneous responses

Numerous studies have examined how political connections and SOEs status enhance firms’ ability to secure external funding, particularly long-term bank loans for investment purposes (Gulen & Ion, 2016) Political influence, particularly from SOEs in Vietnam, may play a significant role in shaping the heterogeneity of monetary policy effects It is widely held that SOEs, benefiting from explicit or implicit government guarantees, receive high credit ratings for bank loans, influencing monetary policy transmissions (Song et al., 2011; Gao et al., 2019; Li et al., 2020) The special financial access enjoyed by SOEs is a result of government intervention rather than relying on high net worth for collateral, and a higher level of government intervention correlates with improved access to credit resources (Cull et al., 2015)

In weak-investor-protection environments like Vietnam, the government's "grabbing hand" is often seen as outweighing its "helping hand." Despite ongoing reforms, financial markets remain underdeveloped, with bank loans as the primary external financing source Additionally, SOEs' investment plans are typically rigid and difficult to adjust in response to monetary policy surprises A key implication of this is that SOEs are unlikely

to take advantage of excessively expansionary monetary policies to increase unplanned investments Doing so could alter their commitments to state capital-holding agencies and heighten governance-related risks

Another perspective to consider is that SOEs may not need to capitalize on unexpected money supply growth, even though lower interest rates improve access to

external funding through the commercial banking system, because they already have this advantage under normal conditions It is widely recognized that SOEs, benefiting from explicit or implicit government guarantees, receive high credit ratings for bank loans, which in turn influences monetary policy transmission (Gao et al., 2019; Gulen & Ion, 2016; Li et al., 2020) In Vietnam, Tran et al (2024) argue that politically connected firms have stronger bargaining power in capital markets, enabling them to secure external funding more easily from the commercial banking system

Evidence suggests that foreign investors help mitigate agency conflicts and promote governance reforms (Aggarwal et al., 2011) The recent opening of Vietnam’s economy

to foreign investors provides an opportunity to examine the role of foreign ownership in corporate governance Their impact is driven by stronger governance practices and external oversight, positioning foreign investors as key actors in shaping corporate investment behavior This suggests that non-state and foreign-owned enterprises are better able to capitalize on unexpected money supply growth by reducing reliance on internal cash flows, as lower interest rates improve access to external funding Moreover, private and foreign firms prioritize maximizing firm value They actively monitor capital markets, quickly act on profitable opportunities, manage risk, and leverage cheaper external capital

H3 Vietnamese firms with state ownership or foreign ownership exhibit heterogeneity in

investment–cash flow sensitivity under the impact of increasing monetary policy surprises

2.4 Unveiling the asymmetric effects

2.4.1 Monetary policy surprises and corporate cash holdings

When the government implements changes to its economic policies, firms encounter uncertainty due to unexpected shifts in the economic and firm’s environment In response, they may need to adjust their financial decisions to align with the new conditions (Gulen & Ion, 2016; Nguyen & Phan, 2017) One critical decision is how much cash to hold While maintaining cash reserves can protect against liquidity issues, holding excessive amounts can be costly, offering zero net present value and incurring other expenses Two key theories commonly referenced to explain corporate cash holding behavior are the precautionary motive (Keynes, 1937) and agency theory (Jensen, 1986; Meckling & Jensen, 1976)

Under a modified agency view, managers may maintain higher cash reserves Additionally, firms hold more cash for precautionary reasons, anticipating difficulties in securing future financing (Dudley & Zhang, 2016; Demir & Ersan, 2017; Li, 2019) To safeguard against cash flow shortfalls, firms typically accumulate and retain cash to fund valuable investment opportunities (Duchin et al., 2010) High levels of information