Corporate decision making in the presence of political uncertainty: The case of corporate cash holdings |
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| Authors: | William B Hankins Anna-Leigh Stone Chak Hung Jack Cheng Ching-Wai |
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| Institution: | 1. Department of Finance, Economics, and Accounting, School of Business and Industry, Jacksonville State University, Jacksonville, Alabama;2. Department of Economics, Finance, and Quantitative Analysis, Brock School of Business, Samford University, Birmingham, Alabama;3. George Dean Johnson, Jr. College of Business and Economics, University of South Carolina Upstate, Spartanburg, South Carolina;4. Bank of England, London, UK |
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| 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 research and development spending. |
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| Keywords: | cash holdings economic policy uncertainty SVAR U S partisan conflict E32 G30 G32 |
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