Does Partisan Conflict Impact the Cash Holdings of Firms? A Sign Restrictions Approach

Abstract

This paper explores how US partisan conflict impacts the cash management decisions of US firms. Using a sign restrictions approach to identify structural shocks to partisan conflict, we find that an exogenous 10% rise in the Partisan Conflict Index above trend is associated with a 0.4 percentage point increase in average cash-to-total assets above trend. These baseline results hold for both the mean and median ratio of cash-to-total assets for all firms in our sample, across the total assets distribution, as well as for different classifications of firms. Additionally, we conduct a series of robustness checks, including a firm-level regression analysis, all of which uphold these results. Our findings reinforce the signaling effect that political dysfunction can have on corporate managers.

Keywords: Partisan Conflict, Cash Holdings, Economic Policy Uncertainty, VAR, Sign Restriction

JEL Classification: G30, G32, E32