The impact of geopolitical risk on firm financial performance: the moderating roles of leverage and cash holdings in Thailand

Abstract

This study examines how geopolitical risk affects the financial performance of Thai firms, with particular focus on the moderating roles of leverage and cash holdings. Using a panel of non-financial firms in the SET100 index from 2010 to 2024, this research investigates whether rising geopolitical risk weakens firm performance and how firms’ capital structure and liquidity shape this relationship. Firm performance is measured by two complementary indicators: Tobin’s Q, which reflects market-based valuation, and return on assets (ROA), which reflects accounting profitability. The analysis employs a panel regression model with firm fixed effects to test three main hypotheses. First, I examine whether geopolitical risk negatively affects firm performance. Second, I investigate whether higher leverage strengthens this negative effect, based on the expectation that more financially constrained firms are more exposed to external shocks. Third, I analyze whether larger cash holdings buffer firms against the adverse effect of geopolitical risk. The findings reveal a relationship that differs across the two performance measures. Geopolitical risk has a negative and statistically significant effect on Tobin’s Q in the complete model, while its effect on ROA is weaker and not statistically significant. This provides partial support for the first hypothesis and indicates that geopolitical risk is reflected more clearly in market-based valuation than in current accounting profitability. Since the complete model includes interaction terms, the direct coefficient on geopolitical risk should be interpreted together with the moderating effects of leverage and cash holdings. The moderating results are mixed. The interaction between geopolitical risk and leverage is not statistically significant, and its sign is unstable across specifications; therefore, the second hypothesis is not supported. In contrast, the interaction between geopolitical risk and cash holdings is positive and significant for Tobin’s Q in the main specification, while a directionally similar but weaker pattern is observed under alternative proxy definitions. This supports the third hypothesis in the market-valuation dimension and indicates that cash holdings help reduce the negative valuation effect of geopolitical risk. These findings contribute to the understanding of how geopolitical risk influences firm performance in an emerging market and highlight cash holdings, rather than leverage, as the more reliable buffer against this form of uncertainty. The results have practical implications for corporate managers who manage liquidity under external uncertainty, for investors who assess firm exposure to geopolitical risk, and for policymakers concerned with firm resilience in the Thai market.