Political Instability, Corruption, and Corporate Cash Holdings: Evidence from Africa

Abstract

This paper aims to investigate how political determinants, namely political instability and the persistence of corruption, impact on corporate cash holding decisions in Africa. We used a sample of 541 listed firms from seven African countries over the period 2014–2019. We used a dynamic panel data regression to identify the relationship between the two political determinants and cash holdings. Our results confirm that political instability is negatively related to cash holdings in accordance with the precautionary motive of cash holdings. Moreover, corruption is positively related to cash holdings, which is consistent with the trade-off theory. Our results suggest that political determinants also have an impact on the cash decisions of African listed firms as they are forced to adjust their cash holdings according to how politically stable the country is. This study contributes to the literature on corporate cash holdings by establishing a conclusive relationship between political instability and corruption, and corporate cash holdings for African countries.

Keywords: Cash holdings, political instability, corruption, Africa

JEL Classification: G30, O16, D72