Anticorruption, Political Connections, and Corporate Cash Policy: Evidence from Politician Downfalls in China
60 Pages Posted: 12 Oct 2020
Date Written: October 30, 2020
We examine how firms change their cash policies in response to the downfall of corrupt politicians in China. We find that firms connected to their local government increase cash holdings when high-profile politician downfalls occur in the government. Consistent with the precautionary saving argument, the effect is stronger for firms that have greater investment opportunities or face greater financial constraints. Compared to unaffected firms, affected firms save more cash out of cash flows and have a higher marginal value of cash holdings. Overall, we show that the collapse of firms' political connections has significant impacts on those firms' financial policies.
Keywords: Anticorruption, politician downfalls, political connections, cash policy
JEL Classification: G32, D73
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