Corporate Cash and Political Uncertainty

Abstract

How does political uncertainty affect firms’ cash saving behavior? We show theoretically that firms increase cash balances before and draw down these balances after high-uncertainty periods. Using gubernatorial election timing to measure uncertainty, we find firms save an extra quarter’s worth of cash before elections. We show heterogeneity in how firms build up pre-election cash balances. Firms with ongoing payout decrease payout. Firms without consistent payout are more likely to adjust the number and magnitude of pre-election equity issuances. Differences between firms’ financing and payout policies mean that no one source of cash explains firms’ saving behavior before high-uncertainty periods.

Keywords: corporate saving, cash, political uncertainty, gubernatorial elections, economic policy uncertainty

JEL Classification: D72, G31, E21