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Does firm-level political risk affect cash holdings?

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Abstract

We investigate whether firm-level political risk affects corporate cash holdings. Taking a sample of 5424 US firms with 129,750 firm-quarter observations from 2002Q1 to 2021Q3, we find that cash holdings is higher for firms with greater exposure to firm-level political risk. The positive relationship between firm political risk and cash holdings is consistent for financial constraint and non-constraint firms, high and low growth firms, pro-cyclical and counter-cyclical and competitive industries. Further, our findings are consistent to alternative measures of firm-level political risk and cash holdings. In addition, our findings remain robust with different endogeneity tests: a natural experiment, an instrumental variable approach, and a propensity score matching. Overall, we present novel evidence on the determinants of corporate cash holdings.

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Notes

  1. The proposed new district lines of the 2010 census were settled in court in 2011. Thus, we consider 2011 when redistricting was implemented.

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Authors and Affiliations

  1. Warwick Business School, University of Warwick, Coventry, UK

    Shehub Bin Hasan

  2. Leicester Castle Business School, De Montfort University, Leicester, UK

    Md Samsul Alam

  3. School of Business, University of Dundee, Dundee, UK

    Sudharshan Reddy Paramati

  4. Suffolk Business School, University of Suffolk, Ipswich, UK

    Md Shahidul Islam

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  1. Shehub Bin Hasan
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  2. Md Samsul Alam
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  3. Sudharshan Reddy Paramati
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  4. Md Shahidul Islam
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Correspondence to Md Samsul Alam.

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Appendices

Appendix A

See Table 12.

Table 12 Definition of variables
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Appendix B

See Table 13.

Table 13 Capital expenditures, retained earnings, and cash holdings across firm-level political risk terciles
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Hasan, S.B., Alam, M.S., Paramati, S.R. et al. Does firm-level political risk affect cash holdings?. Rev Quant Finan Acc 59, 311–337 (2022). https://doi.org/10.1007/s11156-022-01049-9

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