Corporate Cash and Political Uncertainty

Abstract

How does political uncertainty affect firms' saving? Using a dynamic difference-in-difference framework and gubernatorial elections as a source of uncertainty, we show that firms save an extra quarter's worth of cash before elections. Changes to saving dwarf changes to investment around elections and are likely driven by higher cost of capital. No one source of cash explains firms' aggregate pre-election saving. Firms that can cheaply raise funds by decreasing payout do so, or adjust leverage ratios. Firms that rely on external equity markets to raise cash adjust the timing and magnitude of issuances to avoid higher financing costs around elections.

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

JEL Classification: D72, G31, E21