37 Pages Posted: 30 Dec 2016
Date Written: December 23, 2016
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: 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