Terrorism, institutional environment, and corporate cash holdings

Abstract

Using a sample of firms from 35 countries from 2002 to 2019, we investigate the effect of terrorism on corporate cash holdings. We find a significant positive relationship between terrorism and corporate cash holdings. This effect is more pronounced for firms operating in countries with weaker institutional environments and less risk-oriented cultures. Further analysis suggests that increased informational opacity, high earnings and cash flow volatility, higher cost of debt, and lower payout ratio are plausible channels through which terrorism influences firms’ cash holdings. Finally, we show that higher cash holdings help mitigate the negative effects of terrorism on investment. This finding supports the precautionary savings theory, highlighting how firms maintain financial flexibility to enhance organizational resilience in the face of terrorism-related risks.