Corporate Cash and Political Uncertainty

Abstract

How does political uncertainty affect firms' cash saving behavior? We show theoretically that predictable uncertainty periods cause firms to build up cash balances in advance of the uncertain event, then draw down the balances afterwards. Unpredictable uncertainty periods do not cause a cash buildup, but do produce a cash draw down once the uncertainty resolves. Consistent with these predictions, we find higher firm cash balances before elections but not before spikes in the EPU index, which is a measure of less predictable political uncertainty, and that drawdowns in cash following high EPU periods are smaller than post-election drawdowns.

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

JEL Classification: D72, G31, E21