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

See all articles by William Hankins

William Hankins

Jacksonville State University, Alabama

Anna-Leigh Stone

Samford University

Chak Hung Jack Cheng

University of South Carolina Upstate

Ching-Wai (Jeremy) Chiu

Bank of England

Date Written: May 23, 2019

Abstract

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

Suggested Citation

Hankins, William and Stone, Anna-Leigh and Cheng, Chak Hung Jack and Chiu, Ching-Wai (Jeremy), Corporate Decision-Making in the Presence of Political Uncertainty: The Case of Corporate Cash Holdings (May 23, 2019). The Financial Review, Forthcoming , Available at SSRN: https://ssrn.com/abstract=3147902 or http://dx.doi.org/10.2139/ssrn.3147902

William Hankins (Contact Author)

Jacksonville State University, Alabama ( email )

700 Pelham Rd N
Jacksonville, AL 36265
United States

Anna-Leigh Stone

Samford University ( email )

800 Lakeshore Drive
Birmingham, AL 35229
United States

Chak Hung Jack Cheng

University of South Carolina Upstate ( email )

Spartanburg, SC 29306
United States
8645035510 (Phone)

Ching-Wai (Jeremy) Chiu

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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