Unveiling diversity: Does diversity of uncertainty influence corporate cash holdings?

We explore an important aspect of economic policy uncertainty (EPU) that has been surprisingly overlooked in the literature, i.e., diversity of uncertainty. Firms experience greater diversity of uncertainty when dealing with multiple areas of uncertainty simultaneously. By contrast, when uncertainty is concentrated in one or few areas, there is lower diversity of uncertainty. Coping with several distinct areas of uncertainty is likely more complicated and thus riskier. Consistent with this notion, our results, based on a large sample of almost 300,000 observations over 36 years, suggest that firms are more circumspect and thus hold significantly more cash when grappling with multiple sources of EPU. Greater diversity of uncertainty results in significantly higher cash holdings. Notably, the effect of the diversity of EPU is above and beyond the effect of the level of EPU on cash holdings, suggesting that it constitutes a separate and distinct dimension that warrants careful consideration. Further analysis robustly validates the results, i.e., propensity score matching, entropy balancing, and Lewbel’s (2012) heteroscedasticity identification. • •The effect of EPU diversity is distinct from the overall level of EPU. • •Diversity in uncertainty is lower when concentrated in a few areas. • •Both the diversity of EPU and the overall level of EPU affect corporate cash holdings. • •Cash holdings is higher with greater diversity in uncertainty. • •Results are robust to PSM, entropy balancing, and Lewbel’s (2012) heteroscedasticity identification.