Corporate Decision-Making in the Presence of Political Uncertainty: The Case of Corporate Cash Holdings
The Financial Review, Forthcoming
42 Pages Posted: 23 Mar 2018 Last revised: 26 Aug 2019
Date Written: May 23, 2019
Using a quarterly panel of U.S. corporations over the period 1985 – 2014 we show that corporate managers respond to political uncertainty and economic policy uncertainty shocks in different ways. We proxy for political uncertainty using the Partisan Conflict Index and employ a prevalent empirical macroeconomic methodology to construct structural shocks that are orthogonal to shocks captured by the Economic Policy Uncertainty Index. Following a political uncertainty shock, corporations increase cash but do not adjust investment. Alternatively, following an economic policy uncertainty shock, firms appear to draw on cash and reduce capital spending to increase R&D spending.
Keywords: Cash Holdings, Economic Policy Uncertainty, SVAR, U.S. Partisan Conflict
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