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.

1. Introduction

Cash is the lifeblood of a corporation, essential for navigating the complexities of modern markets and ensuring business sustainability [1,2]. Given the increasing volatility in global markets, particularly within China—a major global economic player—understanding how macroeconomic factors influence corporate cash holdings is now more crucial than ever [3]. Companies hold cash primarily for transactions, precautionary measures, and speculative opportunities. Following the global financial crisis, businesses have increasingly adopted enhanced liquidity management and raised cash holdings to safeguard against financial uncertainties [4]. The availability of funds for business assets is primarily constrained by the external capital market, economic cycles, and government policies [5].

Economic cycles significantly impact a company’s cash holdings by influencing external financial constraints [6,7]. During downturns, companies often face declines in operational income due to reduced market demand, adversely affecting cash flow and capital turnover. Additionally, heightened restrictions on external financing during these periods often compel firms to adopt more conservative cash management strategies. This adaptation can be understood through the “economic cycle fluctuation-financing constraints-liquidity management” transmission mechanism, rooted in financing constraint theory [8].

Government policies, as another critical macroeconomic factor, substantially influence the cash holdings of listed corporations [9]. The relationship between monetary policy cycles and economic cycles, and their combined impact on corporate cash holdings, is particularly significant in the context of China’s unique financial system [10]. This study aims to dissect how macroeconomic policies, particularly monetary policy and economic policy uncertainty, influence the cash holdings of listed firms in China. By examining both the direct impacts and the nuanced interactions of these policies, this study aims to provide fresh insights into strategic financial management under varying economic conditions.

Given China’s distinct market characteristics—including high corporate cash holdings, significant market fluctuations, and a bank-dependent financing structure—it is imperative to tailor our approach to studying these impacts within this specific context [11,12,13]. Economic policy uncertainty affects corporate cash holding decisions in the following two key aspects: heightened uncertainty leads to more cautious investment decisions by management, reducing overall investment levels, while financial institutions, responding more cautiously to business financing needs, reinforce the need for companies to bolster their cash holdings as a precaution [14].

The interaction between monetary policy cycles and economic cycles significantly influences the cash holdings of Chinese corporations, a topic that remains widely debated among scholars. This study delves into these relationships, seeking to understand how fluctuations in economic and monetary policies shape corporate financial behaviors. Compared with previous research, in this research, both the independent and combined effects of economic cycles and government policies on cash holdings are uniquely investigated, which offers new insights into how businesses can navigate the complex interplay of economic forces to optimize their financial strategies, particularly within the volatile Chinese market [15,16].

The subsequent sections are organized as follows: Section 2 provides a review of the literature and the hypotheses are developed; in Section 3, the research methodology is described; in Section 4, the empirical analysis is presented; and in Section 5 the conclusions and suggestions are discussed.

2. Literature Review and Hypothesis

2.1. The Relationship between Economic Cycles and Cash Holdings in Publicly Traded Enterprises

The decision to hold cash is a pivotal aspect of corporate financial strategy, directly influencing a company’s ability to navigate economic fluctuations, maintain financial stability, and capitalize on investment opportunities. Cash holdings, as defined in this study, include monetary funds, short-term investments (pre-2006 Chinese standards), and transactional financial assets (post-2006 Chinese standards). The prior research has pre-dominantly examined cash holding decisions through the lenses of a company’s financial status [17,18] and governance structure [19]. Additionally, some studies have examined the impact of various microlevel influences [20] and industry competition [21]. However, a significant body of work in the literature has highlighted the macroeconomic environment’s critical role, particularly the influence of economic cycles on financing constraints, which in turn shape cash holding behavior. During periods of financial stress, companies exhibit heightened sensitivity to cash flow fluctuations, which significantly impacts their investment behavior [22,23]. The recent evidence suggests that in adverse macroeconomic conditions, companies facing increased financing constraints tend to augment their cash holdings as a precautionary measure [24,25]. Additionally, the research indicates that firms adjust their cash management strategies dynamically in response to changing economic conditions, underscoring the importance of understanding the cyclical nature of corporate liquidity management [26].

Extensive research on corporate cash holding behavior has resulted in several hypotheses from global scholars. The tradeoff theory suggests that cash holdings serve as crucial assurance for securing future investment opportunities [27]. The optimal level of cash holdings is a balance between the opportunity cost of holding cash and the benefits it provides, shaped by the conflicting interests of shareholders and creditors. In the context of principal agent theory, managers might accumulate surplus cash for overinvestment, driven by self-interest to enhance personal benefits, which contradicts the goal of maximizing shareholder value. This phenomenon, described as the “free cash flow agency cost hypothesis” of Jensen (1976) [28], has been substantiated in studies on the Chinese market [29,30].

Furthermore, financing constraint theory suggests that imperfections in capital markets create barriers to obtaining external funds. As a result, firms are likely to increase their cash holdings as a precautionary or speculative strategy to ensure liquidity for future investments while minimizing financing costs [31]. Funding limitations can also stem from disparities in the cost of internal versus external financing [32,33] or due to credit rationing [34,35]. Economic cycle variations significantly affect a company’s ability to secure external financing [36]. Market uncertainties and rising financing costs during economic downturns often make external finance more expensive than internal options, leading firms to hold more cash as a buffer against potential risks [37]. Increased macroeconomic uncertainty further prompts firms to increase their cash holdings to mitigate future financial risks and secure investment opportunities [38].

Generally, during periods of economic growth, favorable external funding conditions lead corporations to reduce cash holdings and increase investment activities. However, in times of economic downturn, reduced financing capacity compels managers to increase cash holdings as a defensive measure against financial instability, ensuring the continuation of investment activities. Consequently, firms typically hold more cash during economic downturns compared to periods of economic growth [39,40]. This cyclical behavior of cash holdings highlights the intricate relationship between economic conditions and corporate liquidity management, emphasizing the need for firms to adapt their strategies in response to evolving macroeconomic environments.

Based on the above analysis, the following hypothesis is proposed:

Hypothesis 1.

Business cycle fluctuations are negatively correlated with the cash holdings of listed companies. Specifically, during economic contractions, firms increase their cash holdings, whereas, during periods of economic expansion, they tend to hold less cash.

2.2. The Relationship between Macroeconomic Policy and Cash Holdings of Listed Firms

Monetary policy encompasses a variety of actions by governments or central banks aimed at regulating the money supply and credit conditions to influence economic activities and achieve desired macroeconomic outcomes [41]. In the context of China, where the capital markets are still developing, listed companies often rely heavily on bank financing, making them particularly sensitive to changes in monetary policy. Unlike in more developed economies, where companies have diverse financing options, the Chinese market is characterized by limited alternatives, leading to a significant impact of monetary policy on corporate cash holdings [42]. When the government tightens monetary policy, credit conditions become stricter, increasing the cost of external financing and prompting companies to increase their cash holdings as a precautionary measure. Conversely, when monetary policy is loosened, companies find it easier to obtain credit, which often results in lower cash holdings as more capital is allocated to investment opportunities.

Monetary policy operates through various channels, with the most significant being the monetary channel and the credit channel [43]. The monetary channel functions by adjusting the money supply, which in turn influences the balance of supply and demand, causing shifts in interest rates and exchange rates, thereby affecting overall investment levels. The transmission mechanism can be represented with the following: ΔM→ΔR→ΔI→ΔY. On the other hand, the credit channel focuses on how changes in the money supply impact bank lending practices. For instance, a decrease in the money supply leads to higher interest rates, which weaken banks’ financial positions, reduce lending activities, and consequently lower investment and output levels [44]. In the context of China, the credit channel tends to have a more significant impact than the monetary channel due to the heavy reliance on bank financing [45,46]. This distinction is crucial in understanding how monetary policy influences corporate cash holdings in different economic environments.

Regardless of whether the monetary or credit channel is more influential, monetary policy impacts corporate cash holdings by introducing financing constraints, similar to the effects observed during different phases of the economic cycle. During periods of tight monetary policy, banks raise interest rates and limit loan availability, making it difficult for companies to secure necessary funding for investment, which leads to an increase in cash holdings as a safeguard [47]. Additionally, monetary policy affects business investment behavior by influencing debt financing conditions, capital costs, and overall cash flow [48,49,50]. Given the underdeveloped state of China’s capital markets, listed companies frequently encounter significant financing difficulties, which further accentuates the im-pact of monetary policy on cash holdings. This leads to the following hypothesis:

Hypothesis 2a.

Monetary policy has a negative correlation with the cash holdings of listed firms. During periods of restrictive monetary policy, firms tend to hold more cash, whereas, during expansionary monetary policy, firms tend to hold less cash.

Economic policy volatility heightens the unpredictability of a firm’s operating environment, thereby increasing systemic risk and influencing cash holdings [51]. When companies face high levels of economic policy uncertainty, this exacerbates uncertainties about future cash flow, making it more challenging to predict and manage future cash needs. As a result, companies often increase their cash holdings as a precautionary measure to mitigate risks associated with an unstable economic environment [52]. Moreover, heightened economic policy uncertainty can complicate the ability of authorities to monitor corporate actions, potentially leading to increased cash holdings as firms seek to protect themselves from potential regulatory or financial shifts. This analysis leads to the following hypothesis:

Hypothesis 2b.

There is a positive correlation between economic policy uncertainty and the cash holdings of listed companies. When economic policy uncertainty is high, listed companies tend to increase cash holding; conversely, when uncertainty is low, they may reduce their cash holdings.

2.3. The Relationship between Economic Cycles, Economic Policy, and Cash Holdings in Listed Firms

Mitchell (2022) defines the business cycle as the fluctuation in a nation’s aggregate economic activity, encompassing the following four phases: recovery, expansion, boom, and depression [53]. For analytical simplicity, the economic cycle can be categorized into the two phases of growth and decline [54]. However, scholars have argued that the four-stage division of contraction, recovery, prosperity, and recession provides a more comprehensive explanation [55]. Chinese scholars commonly use the two-stage and four-stage models to analyze China’s economic cycle, which have been extensively utilized. This study adopts a hybrid approach, considering both the expansion phase (recovery and prosperity) and the austerity phase (recession and depression) for analyzing China’s economic cycle. Utilizing data from 2004 to 2019, in this study, the methodology proposed by Mitchell (2022) [53] is applied, categorizing the lower quartile of GDP growth as the depression phase and the upper quartile as the boom phase. The aim is to explore the distinct phases of the economic cycle and assess how macroeconomic policy impacts corporate cash holdings throughout these stages.

The interplay between the business cycle and monetary policy has been a focal point in macroeconomic research for decades [56]. Understanding this relationship is critical for effective economic management. For instance, negative monetary policy shocks can impede output growth, while positive shocks had minimal impact. There is a strong correlation between the effects of short-term monetary policy adjustments on output and prices, the direction of monetary policy, and the stage of the economic cycle [57]. Furthermore, the influence of monetary policy on output is more pronounced during economic downturns than in periods of economic growth, highlighting monetary policy’s asymmetry [58]. This leads to the following hypothesis:

Hypothesis 3a.

The phase of the economic cycle influences how monetary policy affects corporate cash holdings. Specifically, during a recession, expansionary monetary policies can help offset the increase in cash holdings, while during periods of economic prosperity, contractionary monetary policies can help moderate the reduction in cash holdings.

Government economic policies can be more effective if they align with the economic cycle’s rhythm. During periods of economic expansion, firms boost investment and decrease cash holdings due to dynamic market conditions. However, in times of economic volatility, firms may increase cash holdings as a buffer against uncertain conditions, particularly when economic policies are inconsistent [59]. In contrast, during a recession, a stable and predictable economic policy environment can help firms manage uncertainty, optimize investment, and reduce the need for high cash holdings. This leads to the following hypothesis:

Hypothesis 3b.

Stable economic policies can mitigate the negative relationship between economic cycle fluctuations and corporate cash holdings. Specifically, during economic prosperity, stable policies can temper the decline in cash holdings, while during downturns, they can prevent excessive cash hoarding.

3. Research Design

3.1. Model Design and Variable Definition

Given the diverse nature of research on the cash holdings of listed firms, in this study, a fundamental test model is constructed, based on previous research frameworks [60,61] to examine the influencing factors. In this study, the influence of economic cycles and macroeconomic policies on corporate cash holdings is influenced. In constructing the model, we utilized multiple regression analysis, drawing on established literature. Multiple regression is well-suited for addressing the complex relationships among numerous independent variables and provides a clear and concise way to uncover the underlying links between independent and dependent variables, thereby offering robust support for our research inquiry. The model is as follows:

$${\mathrm{C}\mathrm{A}\mathrm{S}\mathrm{H}\mathrm{R}}_{i,t}={\alpha }_0+{\alpha }_1{Ecocy}_t+{\alpha }_2{Mopcy}_t+{\alpha }_3{EPU}_t+{\alpha }_4{SIZE}_{i,t}+{\alpha }_5{MBI}_{i,t}+{\alpha }_6{LEV}_{i,t}+{\alpha }_7{NWC}_{i,t}+{\alpha }_8{SD}_{i,t}+{IndustryEffecy}_i+{\epsilon }_{i,t}$$

(1)

Among them, the regression coefficient is denoted as ${\alpha }_k(k=\mathrm{1,2},\dots ,32)$, i represents the firm i, and t denotes the time t. Ecocy represents the economic cycle variable in period t, Mopcy represents the monetary policy variable in period t, and EPU represents the variable in period t. Introducing business cycle and monetary policy variables simultaneously will result in significant multicollinearity issues due to their high correlation. Consequently, they are used as substitute variables for both the business cycle and monetary policy variables individually. The testing model includes the following variables.

1.

Dependent variables

Cash Holdings (CASHR): In this study, the impact of the macroeconomic environment on the cash holdings of publicly traded corporations is primarily investigated. The ratio of corporate cash holdings to total corporate assets (CASHR) is used as an indicator, considering the varying sizes of listed corporations. Furthermore, besides financial resources, the cash in this index includes short-term investments (pre-2006 criteria) and transactional financial assets (post-2006 criteria).

2.

Independent variables

The economic cycle (Ecocy) refers to the recurring pattern of economic expansion and contraction over time in a country or region. The prosperity and recession of the macroeconomic environment directly affect the variations in the gross national product. Currently, China’s economic market is in a developmental phase, and economic cycle fluctuations impact the pace of market expansion, specifically the yearly GDP growth rate. In this study, the GDP growth rate is used as a measure of the economic cycle.

The bankers’ monetary policy sentiment index (Mopcy) measures bankers’ sentiment toward monetary policy. The index represents the percentage of bankers who judge the monetary policy to be “suitable”. This index represents bankers’ assessments of overall loan demand. Due to prolonged stringent monetary policy implementation in China, many bankers perceive the policy as moderate. A lower value corresponds to a stricter monetary policy.

Economic policy uncertainty (EPU) refers to the uncertainty level around economic policies and their potential economic impact. Enterprise decision-making is influenced by economic policy uncertainty, representing systematic risk. This research uses China’s economic policy uncertainty data to compute quarterly economic policy uncertainty.

3.

Control variables

In this paper, the following six control variables are introduced based on the relevant literature [62,63]: company size (SIZE), main business income (MBI), asset–liability ratio (LEV), net working capital ratio (NWC), short-term debt ratio (SD), and industry. The relevant variables are displayed in the subsequent table (

Table 1. Variable description table.

Variable Categories	Variable Name	Variable Symbol	Variable Description
Explained variable	Cash holding rate	CASHR	Cash as a percentage of its total assets
Explanatory variable	Economic cycle	Ecocy	GDP quarterly growth rate
	Bankers’ Monetary Policy Perception Index	Mopcy	A diffusion index that reflects bankers’ judgment of the overall demand for loans
	Economic policy uncertainty	EPU	Drawing on the Chinese economic policy Uncertainty Index [64] $\left({\displaystyle \frac{3{EPU}_m+2{EPU}_{m-1}+{EPU}_{m-2}}{6}}\right)/100$
Control variables	Company size	SIZE	The natural logarithm of the company’s total assets
	The level of income from the main business	MBI	The natural logarithm of the current main business revenue
	Asset-liability ratio	LEV	Total current period liabilities/Total current period assets
	Net working capital ratio	NWC	(Working capital—monetary funds—short-term investments)/Total assets at end of period
	Short-term debt ratio	SD	Current short-term borrowings/current total assets
	Industries	Industry	Industry Dummy Variables [65]

):

Additionally, our selection of control variables is grounded in a solid theoretical foundation, informed by previous studies. These control variables are crucial for mitigating or eliminating confounding factors that could potentially distort the relationship between the dependent variable and the independent variables. This approach ensures that our model more accurately reflects the intricate realities of the economic environment. By carefully selecting control variables, we minimize estimation bias due to omitted variables, thereby enhancing the precision, robustness, and explanatory power of our research findings.

3.2. Sampling Methodology and Data Origin

In 2004, the People’s Bank of China, along with the National Bureau of Statistics, introduced the Monetary Policy Perception Index. Hence, in this study, A-share listed companies are selected in Shanghai and Shenzhen from 2004 to 2019 as research subjects, further narrowing down the sample as follows:

(1)

Companies with incomplete data for key variables during the study period are excluded.

(2)

Companies listed for less than two years or declared special treatment (ST) or provisional treatment (PT) during the study period are excluded.

(3)

Financial listed companies are excluded.

Subsequently, all continuous variables in the sample were adjusted by 1% up or down to mitigate the influence of outliers, resulting in 83,739 valid data points from 2004 to 2019. The financial data for this study were sourced from Wind and CSMAR Economic and Financial Research Database, while the Monetary Policy Perception Index was obtained from the “Bankers Questionnaire” published on the People’s Bank of China’s website. The data were processed and analyzed using STATA 14.0 statistical software.

4. Empirical Process and Test Results

4.1. The Application of Descriptive Statistics and Correlation Analysis

The descriptive statistical results of the key variables are presented in

Table 2. Descriptive statistics of the main variables.

Variable Symbols	Variable Name	Sample Size	Mean	Standard Deviation	Minimum	Lower Quartile	Median	Upper Quartile	Max.
CASHR	Cash holding ratio	83,739	0.187	0.150	0.008	0.083	0.143	0.243	0.707
Mopcy	Banker’s money feeling index	83,739	0.586	0.156	0.312	0.412	0.579	0.720	0.810
SIZE	Size of company	83,739	21.73	1.28	13.19	20.84	21.56	22.41	28.52
MBI	Main business income level	83,739	20.45	1.67	16.34	19.41	20.39	21.42	28.69
LEV	Asset-liability ratio	83,739	0.458	0.213	0.044	0.295	0.467	0.621	0.903
NWC	Net working capital ratio	83,739	0.003	0.210	0.520	0.133	0.007	0.146	0.485
SD	Short-term debt ratio	83,739	0.127	0.121	0	0.018	0.101	0.202	0.477

. The average value of the dependent variable, the cash holding ratio (CASHR), is 18.7%. The disparity in the cash holding ratio is evident, with the highest value at 70.7% and the lowest at 0.8%. The median cash holding ratio for listed companies is 14.3%. Most listed corporations have low cash holdings. The average value of the independent variable, Bankers’ Monetary Policy Perception Index (Mopcy), is 58.6%. The lowest value is 31.2% and the highest is 81%. The median value is 57.9%. This suggests that the majority of bankers believe the monetary policy implemented by the Chinese government is generally suitable.

To provide a clearer insight into the relationship between economic policy uncertainty and GDP growth, we have depicted this relationship over the sample period in Figure 1. The analysis reveals a pronounced negative correlation between the two variables, suggesting that periods of robust economic growth are typically associated with lower levels of economic policy uncertainty.

Table 3. Correlation analysis of major variables.

	CASHR	Ecocy	Mopcy	EPU	SIZE	MBI	LEV	NWC	SD
CASHR	1
Ecocy	−0.0344 ***	1
Mopcy	−0.0172 ***	−0.2031 ***	1
EPU	0.0716 ***	−0.4130 ***	−0.0881 ***	1
SIZE	−0.1913 ***	−0.1687 ***	0.0396 ***	0.0770 ***	1
MBI	−0.1339 ***	−0.0998 ***	0.0423 ***	0.1041 ***	0.7979 ***	1
LEV	−0.4689 ***	0.1042 ***	−0.0112 ***	−0.0703 ***	0.3867 ***	0.3347 ***	1
NWC	−0.1087 ***	−0.1580 ***	0.0383 ***	0.0806 ***	−0.1712 ***	−0.2026 ***	−0.5322 ***	1
SD	−0.3307 ***	0.1529 ***	−0.0310 ***	−0.0963 ***	0.0232 ***	0.0685 ***	0.5326 ***	−0.4697 ***	1

Note: ***, **, * means that the two-tail test is significant at 1%, 5%, and 10% levels, same below.

presents the Pearson correlation coefficients for the key variables examined in this study. The correlation matrix indicates a negative correlation between the cash holding ratio (CASHR) and GDP growth rate, which aligns with Hypothesis 1. The correlation coefficient between the cash holding ratio (CASHR) and Bankers’ Monetary Policy Perception Index is significantly negative, supporting Hypothesis 2a. Additionally, there is a significant positive correlation between the cash holding ratio (CASHR) and economic policy uncertainty (EPU), which aligns with Hypothesis 2b.

4.2. This Study Provides an Examination of the Effects of Economic Cycles on the Cash Holdings of Publicly Traded Corporations

Table 4. Regression analysis of the impact of economic cycle and monetary policy on cash holding level of listed companies.

Explanatory Variables	Baseline Model (1)	Business Cycle (2)	Macroeconomic Policy
			Monetary Policy (3)	Economic Policy Uncertainty (4)
Ecocy		−0.00096 ***
Mopcy			−0.0110 ***
EPU				0.0083 ***
SIZE	−0.0077 ***	−0.0082 ***	−0.0076 ***	−0.0077 ***
MBI	0.0053 ***	0.0055 ***	0.0054 ***	0.0049 ***
LEV	−0.3600 ***	−0.3596 ***	−0.3598 ***	−0.3585 ***
NWC	−0.1996 ***	−0.2010 ***	−0.1992 ***	−0.2010 ***
SD	−0.2337 ***	−0.2325 ***	−0.2340 ***	−0.2312 ***
Industry	control	control	control	control
_con	0.4301 ***	0.4469 ***	0.4352 ***	0.4278 ***
N	83,739	83,739	83,739	83,739
R-square 1	0.2980	0.2981	0.2981	0.2994
F (prob.)	1693.39	1617.76	1617.40	1627.71

Standard errors in parentheses, * p < 0.10, ** p < 0.05, *** p < 0.01. ¹ R-square reports the adjusted R-square.

presents the findings of the experiment testing Hypothesis 1, which examines the influence of economic cycle fluctuations on the cash holdings of publicly traded corporations. Column (1) displays the regression results with only control variables, while column (2) includes the business cycle as the explanatory variable. The regression has an F-value of 1617.76 and an R-squared of 0.2981, suggesting a strong overall fit.

In column (1), the coefficients for the net working capital ratio (NWC) and business size (Size) are negative and statistically significant at the 1% level. This implies that as the net working capital ratio or the size of the company increases, the cash holding ratio decreases. The asset–liability ratio has a strong negative association with the cash holding ratio. A one percentage point drop in the asset–liability ratio corresponds to a 0.3596% increase in the cash holding ratio. There is a strong positive relationship between the cash holding ratio and the level of main business income, and a strong negative relationship with the short-term debt ratio.

There is a strong negative relationship between the economic cycle and the cash holding ratio. This suggests that during periods of economic growth, businesses tend to invest more capital, leading to a decrease in cash holdings. This finding aligns with Hypothesis 1.

4.3. Test Results of Impacts of Macroeconomic Policies on Cash Holdings of Listed Firms

Table 4 presents the test results for Hypothesis 2a and 2b, examining the influence of monetary policy and economic policy uncertainty on the cash holdings of listed corporations. Column (3) displays the regression results for the Bankers’ Monetary Policy Perception Index (Mopcy), used as the independent variable to explain monetary policy. Typically, when the bank reduces the loan interest rate to implement a loose monetary policy, the Bankers’ Monetary Policy Perception Index will increase. Conversely, when the bank increases the loan interest rate to implement a tight monetary policy, the Bankers’ Monetary Policy Perception Index will decrease. The regression model has an F-value of 1617.40 and an R-squared of 0.2981, suggesting a strong overall fit. The regression results in column (3) of Table 4 indicate a significant negative correlation between the Bankers’ Monetary Policy Perception Index and the cash holding ratio of enterprises. This means that during periods of monetary policy tightening, the Bankers’ Monetary Policy Perception Index decreases, leading to an increase in the cash holdings of enterprises. Conversely, during periods of monetary policy loosening, the Bankers’ Monetary Policy Perception Index increases, resulting in a decrease in the cash holdings of enterprises. These findings align with Hypothesis 2a.

Column (4) displays the regression results for economic policy uncertainty (EPU) as the independent variable. The regression model has an F-value of 1627.71 and an R-squared of 0.2994, suggesting a satisfactory overall fit. The regression analysis in column (4) of Table 4 reveals a statistically significant positive correlation between economic policy uncertainty and company cash holdings. When there is significant economic policy uncertainty, businesses tend to increase their cash holdings as a precautionary measure. Conversely, when economic policies are reasonably stable, businesses tend to decrease their cash holdings, aligning with Hypothesis 2b.

4.4. Examining the Effects of Macroeconomic Policies on Cash Holdings of Publicly Traded Corporations in Different Economic Cycles

In this study, the economic cycle is categorized into the following four groups based on GDP growth rate: recovery, expansion, boom, and recession. The first quartile is classified as the boom group, while the last quartile is classified as the recession group. Subsequently, the influence of macroeconomic policies on the cash holdings of publicly traded corporations under various macroeconomic conditions is examined.

Table 5. Regression analysis of the impact of macroeconomic policies on cash holding levels of listed companies under different economic cycles.

Explanatory Variables	Monetary Policy		Economic Policy Uncertainty
	Economic Prosperity (1)	Recession (2)	Economic Prosperity (3)	Recession (4)
Mopcy	−0.0066	0.339 ***
			0.0346 ***	−0.0026**
SIZE	−0.0068 ***	−0.0104 ***	−0.0095 ***	−0.0116 ***
MBI	0.0058 ***	0.0066 ***	0.0075 ***	0.0077 ***
LEV	−0.3038 ***	−0.2838 ***	−0.3033 ***	−0.2833 ***
NWC	−0.1742 ***	−0.1979 ***	−0.1746 ***	−0.1970 ***
SD	−0.2311 ***	−0.1915 ***	−0.2254 ***	−0.1917 ***
Industry	Controls	Controls	Controls	Controls
_con	0.3783 ***	0.3854 ***	0.3651 ***	0.4139 ***
N	21,312	24,147	21,312	24,147
R-square	0.2622	0.2218	0.2679	0.2204
F (prob.)	446.56	405.85	459.64	402.52

Standard errors in parentheses, * p < 0.10, ** p < 0.05, *** p < 0.01.

presents the findings for Hypothesis 3a and 3b, examining the influence of macroeconomic policies on the cash holdings of publicly traded corporations under different economic conditions. All three regressions have an F-value larger than 400, and the adjusted R-squared is greater than 0.22, indicating a strong overall fit. Column (1) presents the regression results for the relationship between monetary policy and cash holdings during a period of economic prosperity, while column (2) presents the regression results for the relationship between monetary policy and cash holdings during a period of economic decline.

Comparing columns (1) and (2), it is evident that during economic prosperity, there is a negative correlation between monetary policy and the cash holdings of listed companies, although it is not statistically significant. Conversely, during an economic recession, there is a significant positive correlation between monetary policy and the cash holdings of listed companies. This suggests that during an economic boom, the country will adopt a relatively strict monetary policy. As a result, businesses’ cash holdings, previously diminished due to the prosperous economic cycle, will suitably increase. This enables enterprises to maintain resilience and handle potential economic downturns effectively.

During an economic recession, there is a strong positive relationship between monetary policy and the cash holdings of businesses. This suggests that in a recession, implementing strict monetary policies makes it harder for businesses to obtain external funding. Consequently, businesses rely on internal financing to sustain production and operations, increasing their risk level. Comparing the significance of the two regression columns, it is evident that monetary policy exerts a more substantial influence on firms during the recession period. Therefore, it is imperative to prioritize monetary policy when the economic climate is unfavorable. China’s monetary policy generally maintains stability for enterprises and mitigates the influence of economic cycles on the cash holdings of listed corporations to some extent.

Column (3) presents the regression analysis of the relationship between economic policy uncertainty (EPU) and the cash holdings during the boom phase. Column (4) presents the regression analysis of the relationship between EPU and the cash holdings during the recession period. Comparing columns (3) and (4), it is evident that there is a strong positive correlation between EPU and the cash holdings of listed companies during periods of economic prosperity. However, during economic recessions, there is a significant negative correlation between EPU and the cash holdings of listed companies.

This suggests that during economic growth, businesses may invest excessively, leading to decreased cash holdings. Additionally, increased economic policy unpredictability makes businesses more uncertain about their prospects, affecting investment decisions. By adopting a more prudent approach, businesses can decrease overall investment and enhance investment efficiency, resulting in higher cash holdings. During a recession, firms have fewer investment opportunities, leading to decreased cash holdings. Economic policy volatility has a pronounced effect on financial institutions, making it more challenging for firms to secure funding, thus reducing cash holdings.

During periods of economic prosperity, companies generally benefit from favorable market conditions and higher profitability. However, when faced with policy uncertainty, corporate managers tend to adopt more conservative financial strategies to ensure sufficient liquidity in an uncertain future environment. Policy uncertainty may manifest as adjustments in tax policies, changes in regulatory environments, and other government decisions that could potentially impact business operations. These uncertainties lead companies to anticipate that the future financial environment might become more constrained, prompting them to increase cash reserves to manage potential risks.

In such situations, companies may reduce investments in new projects or delay expansion plans, opting instead to allocate funds to more conservative assets like cash or cash equivalents. The underlying motivation is that by increasing cash reserves, companies can enhance their financial flexibility, allowing them to maintain operational agility in the face of policy changes. This strategy not only helps companies navigate potential financial pressures but also preserves funds for future investment opportunities, enabling them to act swiftly when market conditions improve or new opportunities arise due to policy changes.

Comparing the significance of the two regression columns, it is evident that EPU has a greater impact on the cash holdings of firms during the prosperous period. It demonstrates that increasing economic policy ambiguity during prosperous times is more impactful in directing enterprises to make sound investments and enhance efficiency. Conversely, during a downturn, it is crucial to balance enterprise risks and judiciously enhance economic policy stability.

Additionally, the four groups are classified based on the economic cycle, and the following two “anomalies” are identified:

(1)

The inverse of the primary regression was observed in all groups experiencing decline.

(2)

Monetary policy does not have a substantial impact on the group experiencing prosperity, but economic policy uncertainty is least influential in the group experiencing recession.

Initially, during periods of economic downturn, firms encounter heightened financial strain. Adopting a stringent monetary policy or increasing economic policy uncertainty exacerbates the financing challenges faced by firms. Consequently, enterprises have little choice but to rely more on internal financing to meet their production and operational needs. During periods of relative prosperity, the unpredictability of monetary and economic policies can also have an impact. This illustrates the varying effects of financing constraint theory in different situations.

Regarding the second “anomaly”, during periods of economic growth, investment prospects increase, the market becomes very active, and there is a more positive outlook for the future. In this context, stringent monetary policy is ineffective in curbing market investment enthusiasm, while lenient monetary policy has limited impact due to existing investment opportunities. During a recession, the market offers fewer investment options, and the outlook for the future is negative. As a result, economic policy uncertainty has a diminished effect on expectations, leading to a decrease in cash holdings.

4.5. Robustness Test

Since both the business cycle and economic policy are macroeconomic factors with strong externalities for enterprises, endogeneity between the explanatory variables and the dependent variable of the model is not a concern. In this paper, the following robustness tests are conducted by changing variables:

First, the residual analysis reveals that most of the standardized residuals fall within the range of −2 to +2, indicating that the model largely meets the underlying assumptions. This suggests that the regression results are both robust and reliable. Second, to validate the robustness and credibility of the regression results, we replaced the economic cycle variable by employing different calculation methods. While the Mitchell approach is indeed a classic method, contemporary research often incorporates more advanced techniques such as regime-switching models [66,67,68]. After substituting the explanatory variables, the regression results remained statistically significant, consistent with our initial hypotheses. Although the measurement methods for economic cycles vary, both approaches yield only minor discrepancies, with the overall trend of economic cycles remaining largely consistent. The correlation between the two methods is notably high, with a coefficient of 0.91. As a result, even when different measurement techniques are employed, the parameter estimates and their statistical significance in the regression results continue to demonstrate robustness and reliability. Last, for the robustness test of monetary policy, M2 is used as the explanatory variable. The two regression results are consistent with the main regression results in this paper.

5. Conclusions and Recommendations

In this study, the impact was investigated of economic cycles and policies on the cash holding decisions of Chinese listed companies within a macroeconomic context. The research focuses on Chinese listed companies from 2004 to 2019. The empirical findings demonstrate that the following:

i.

Economic cycle fluctuations are significantly negatively correlated with the cash holdings of listed companies. Specifically, during recessions, listed companies exhibit higher cash holdings; conversely, during expansionary periods, cash holdings are lower. To mitigate these fluctuations, companies should adopt dynamic cash management strategies that account for changes in the economic cycle, allowing them to maintain optimal liquidity levels across different economic phases.

ii.

The cash holdings of listed companies show a strong negative correlation with both monetary policy and economic policy uncertainty. Firms should closely monitor monetary policy signals and adjust their cash holdings accordingly. During periods of restrictive monetary policy or high economic policy uncertainty, companies should increase their cash buffers to safeguard against potential liquidity constraints. Conversely, in times of expansionary policy or stable economic conditions, firms can reduce cash holdings and allocate resources to growth opportunities.

iii.

There is a combined effect of economic cycles and monetary policy on the cash holdings of listed companies in China. During an economic recession, the impact of monetary policy on cash holdings becomes positive. A restrictive monetary policy will cause companies to reduce their cash holdings. Additionally, the effect of economic policy uncertainty changes from positive to negative, meaning that increased economic policy uncertainty leads to decreased cash holdings. This phenomenon can be explained using the concept of financial constraints. Firms need to be proactive in adjusting their cash management strategies based on the combined effects of economic cycles and monetary policies to avoid being caught unprepared during adverse conditions.

iv.

During economic growth, there is a strong inverse relationship between monetary policy and cash holdings. Conversely, there is a strong positive relationship between economic policy uncertainty and cash holdings. Additionally, the influence of economic policy on cash holdings is greater than that observed in the main regression. Additional testing is conducted on the two subgroups (namely, the transition group) during the intermediate phase of GDP growth rate. The research indicates that the transitional phase has a similar impact on cash holdings in firms. Macroeconomic policies exert discernible effects on firms across different economic cycles. The influence of economic policies on corporate cash holdings transitions from negative to positive over the entire economic cycle. Therefore, firms must continuously evaluate their cash management strategies, aligning them with current economic cycles and policy environments to enhance operational efficiency and build resilience against future uncertainties.

The research in this paper contributes to the understanding of factors influencing corporate cash holdings and the impact of monetary policy. Additionally, it provides significant insights for improving macroeconomic regulation strategies in China. These findings underscore the need for businesses to adopt flexible and adaptive cash management strategies that consider the evolving economic landscape, ultimately supporting sustainable growth and financial stability.