Geopolitical risk and its impact on corporate cash holdings and investment decisions: evidence from Saudi Arabia

This study aims to investigate the relationship between geopolitical risk (GPR) and corporate performance by examining how GPR influences two key corporate decisions—cash holdings and investment—within the Saudi Arabian context. The sample comprises publicly traded companies listed on the Saudi Stock Exchange from 2006 to 2019. Ordinary least squares (OLS) regression is employed to test the hypothesized relationships of the econometric models. Later, the study uses the two-step Generalized Method of Moments (GMM) system to address endogeneity issues. The analysis indicates that GPR significantly influences corporate decisions regarding optimal cash reserves and investment choices. Specifically, the findings show that firms hold lower levels of cash during periods of elevated GPR, a pattern consistent with agency motive theory. In addition, the evidence demonstrates that firms reduce their investment spending under heightened geopolitical uncertainty, aligning with the “wait-and-see” behavior predicted by real options theory. The results remain robust across various sensitivity analyses and after addressing endogeneity using the system GMM estimator. There is a scarcity of empirical evidence on the impact of geopolitical risks on firms, notably within the Saudi context. The findings offer important insights into how GPR affects firms’ operations—particularly their cash-reserve management and investment decisions—in the Saudi context. First, the results provide managers with guidance on navigating periods of rising geopolitical uncertainty by adjusting liquidity strategies and investment planning. Second, financial analysts may incorporate geopolitical factors into their forecasts of corporate performance. Third, investors can use the evidence to better evaluate firms operating in environments exposed to elevated geopolitical risk. Overall, the findings offer important implications for policymakers and corporate managers by underscoring the need for more resilient cash-reserve strategies and flexible investment policies to strengthen risk management, enhance governance, and safeguard firm resources amid persistent geopolitical uncertainties.