Does partisan conflict impact the cash holdings of firms? A sign restrictions approach

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Published on 23 December 2016

Working Paper No. 638
By William B Hankins, Chak Hung Jack Cheng, Ching-Wai (Jeremy) Chiu and Anna-Leigh Stone

This paper explores how US partisan conflict impacts the cash management decisions of US firms. Using a sign restrictions approach to identify structural shocks to partisan conflict, we find that an exogenous 10% rise in the Partisan Conflict Index above trend is associated with a 0.4 percentage point increase in average cash-to-total assets above trend. These baseline results hold for both the mean and median ratio of cash-to-total assets for all firms in our sample, across the total assets distribution, as well as for different classifications of firms. Additionally, we conduct a series of robustness checks, including a firm-level regression analysis, all of which uphold these results. Our findings reinforce the signalling effect that political dysfunction can have on corporate managers.

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