Partisan Conflict, Policy Uncertainty and Aggregate Corporate Cash Holdings

31 Pages Posted: 26 Mar 2018 Last revised: 26 Aug 2018

See all articles by Chak Hung Jack Cheng

Chak Hung Jack Cheng

University of South Carolina Upstate

Ching-Wai (Jeremy) Chiu

Bank of England

William Hankins

Jacksonville State University, Alabama

Anna-Leigh Stone

Samford University

Date Written: August 24, 2018

Abstract

This paper distinguishes political uncertainty from policy uncertainty shocks and uncovers new empirical facts about how each impacts the aggregate cash holdings of US firms. Our baseline structural vector autoregression model shows that an exogenous one standard deviation shock to political and economic policy uncertainty is followed by a 1 and 1.8 percent increase in aggregate corporate cash-to-total assets after five and eight quarters, respectively. The baseline result also shows that policy uncertainty shocks tend to raise financial market volatility while political uncertainty shocks tend to lower financial market volatility. Moreover, we find evidence that political uncertainty exerts asymmetric effects on aggregate corporate cash holdings, with a shock tending to raise cash holdings under normal financial conditions and lower cash holdings under tight financial conditions. Our main results are robust against a wide range of shock identification schemes as well as against parametric and non-parametric model estimations.

Keywords: Partisan Conflict, Cash Holdings, Economic Policy Uncertainty, VAR, Sign Restrictions, Local Projections

JEL Classification: G30, G32, E32

Suggested Citation

Cheng, Chak Hung Jack and Chiu, Ching-Wai (Jeremy) and Hankins, William and Stone, Anna-Leigh, Partisan Conflict, Policy Uncertainty and Aggregate Corporate Cash Holdings (August 24, 2018). Journal of Macroeconomics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3147908 or http://dx.doi.org/10.2139/ssrn.3147908

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

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

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