Cash as a Strategic Buffer: Mitigating the Impact of Geopolitical Risk on Firm Performance in Indonesia

Abstract

Purpose: This study investigates the impact of geopolitical risk (GPR) on firms’ financial performance and evaluates the extent to which internal liquidity serves as a buffer against geopolitical uncertainty. In particular, it explores the moderating effects of net changes in cash, operating cash flow, investing cash flow, and financing cash flow in mitigating the adverse consequences of geopolitical risk on firm performance. Design/methodology/approach: This study employs a fixed-effects regression model as the primary empirical approach. Furthermore, quantile regression analysis is performed to provide additional insights into the distributional effects. To address potential endogeneity concerns, a two-stage least squares (2SLS) estimation is implemented, utilizing geopolitical risk indices from selected ASEAN countries—namely Malaysia, the Philippines, Thailand, and Vietnam—as instrumental variables. Findings: The empirical findings indicate that geopolitical risk (GPR) exerts a statistically significant negative effect on firm financial performance. While net changes in cash mitigate this adverse impact on average, cash flows from investing and financing activities do not exhibit significant buffering effects. In contrast, firms with higher levels of operating cash flow demonstrate a stronger capacity to offset the detrimental effects of geopolitical risk on performance. These results remain robust across a range of specifications, including the use of alternative measures of the GPR index, variations in the sample period, and the inclusion of macroeconomic controls. Research limitations/implications: The results underscore the importance of internal liquidity generation in enhancing firms’ resilience to geopolitical shocks. Accordingly, the study suggests that firm managers prioritize operational efficiency, cost management, and revenue stability, while avoiding excessive or non-essential investments and maintaining prudent leverage levels. From a policy perspective, governments may consider providing targeted incentives or tax relief during periods of heightened geopolitical uncertainty to support corporate stability Originality/value: This study contributes to the existing literature in several important ways. First, by utilizing data from 1996 to 2023, it comprehensively captures major geopolitical risk events affecting Indonesia over an extended period. Second, this study incorporates multiple dimensions of cash flow, rather than focusing solely on net cash flow, by examining operating, investing, and financing cash flows. This approach provides a more complete understanding of the role of liquidity in mitigating geopolitical risk. Third, the study employs geopolitical risk indices from ASEAN countries with similar economic and cultural contexts—Malaysia, the Philippines, Thailand, and Vietnam—as instrumental variables, thereby strengthening the identification strategy.