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Corporate decision making in the presence of political uncertainty: The case of corporate cash holdings

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  • William B. Hankins
  • Anna‐Leigh Stone
  • Chak Hung Jack Cheng
  • Ching‐Wai (Jeremy) Chiu

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.

Suggested Citation

  • William B. Hankins & Anna‐Leigh Stone & Chak Hung Jack Cheng & Ching‐Wai (Jeremy) Chiu, 2020. "Corporate decision making in the presence of political uncertainty: The case of corporate cash holdings," The Financial Review, Eastern Finance Association, vol. 55(2), pages 307-337, May.
  • Handle: RePEc:bla:finrev:v:55:y:2020:i:2:p:307-337
    DOI: 10.1111/fire.12205
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    File URL: https://doi.org/10.1111/fire.12205
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