Policy uncertainty and cash holdings: The role of corporate governance in Brazil

I analyze the role of corporate governance in the relationship between cash holdings and economic policy uncertainty (EPU) in the Brazilian context of weak shareholder protection. Panel regressions using data from 11,689 firm-quarter observations over the 2003–2019 period indicate that EPU decreases cash holdings in companies with good governance practices. In contrast, cash reserves are not affected by EPU in poorly governed firms. Additional tests regarding political uncertainty, endogeneity, and financial constraints confirm the robustness of these results. I also provide evidence that investors discount the value of excess cash in companies with weak governance. My findings are consistent with the free cash flow hypothesis, suggesting that only well-governed corporations can reduce cash holdings when EPU grows to prevent expropriation behavior by controlling shareholders.