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

37 Pages Posted: 30 Dec 2016  

William Bryce Hankins III

Jacksonville State University -- Department of Finance, Economics, and Accounting

Chak Hung Jack Cheng

University of South Carolina Upstate

Ching-Wai (Jeremy) Chiu

Bank of England

Anna-Leigh Stone

Samford University

Multiple version iconThere are 2 versions of this paper

Date Written: December 23, 2016

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 signalling effect that political dysfunction can have on corporate managers.

Keywords: Partisan conflict, cash holdings, economic policy uncertainty, VAR, sign restrictions

JEL Classification: G30, G32, E32

Suggested Citation

Hankins, William Bryce and Cheng, Chak Hung Jack and Chiu, Ching-Wai (Jeremy) and Stone, Anna-Leigh, Does Partisan Conflict Impact the Cash Holdings of Firms? A Sign Restrictions Approach (December 23, 2016). Bank of England Working Paper No. 638. Available at SSRN: https://ssrn.com/abstract=2891352 or http://dx.doi.org/10.2139/ssrn.2891352

William Hankins (Contact Author)

Jacksonville State University -- Department of Finance, Economics, and Accounting ( email )

700 Pelham Rd N
Jacksonville, AL 36265
United States

Chak Hung Jack Cheng

University of South Carolina Upstate ( email )

Spartanburg, SC 29306
United States
8645035510 (Phone)

Ching-Wai (Jeremy) Chiu

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Anna-Leigh Stone

Samford University ( email )

800 Lakeshore Drive
Birmingham, AL 35229
United States

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