Political Connection Disruption, Financial Flexibility and Cash Policy
40 Pages Posted: 1 Feb 2016
Date Written: January 30, 2016
Abstract
We use the disruption of political connection due to the investigation/arrest of top politicians in China as exogenous shocks to firms’ relation-based financing capacity to examine the relation between financial flexibility and cash policy. We find that political connection disrupted firms increase their cash holding relative to otherwise unaffected firms in the post-event period. The results are more pronounced in non-state enterprises, in firms with low tangible assets, and in firms with high investment opportunity. Furthermore, we find that political connection disrupted firms display a higher cash flow sensitivity of cash and enjoy higher marginal value of cash holding than do the unaffected firms. Overall, our results highlight the importance of political connection in the determinant of corporate decisions.
Keywords: Political connection (disruption), financial flexibility, cash policy
JEL Classification: G32, D73
Suggested Citation: Suggested Citation