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Political uncertainty, corruption, and corporate cash holdings

Author

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  • Jayakody, Shashitha
  • Morelli, David
  • Oberoi, Jaideep

Abstract

Exposure to political corruption and political uncertainty separately demands opposing risk management responses: to reduce cash to minimize expropriation and to increase cash to hedge policy risk. We study how local political corruption and political uncertainty interact in their impact on corporate cash holdings within the United States. We find robust evidence that firms located in states with higher corruption scores react to increases in local political uncertainty by increasing cash holdings more than those in less corrupt settings. This behavior suggests that firms in more corrupt settings find it expedient to raise cash to facilitate influence of officials in the face of local political risk. We find further support for this conclusion by showing that politically engaged firms respond to our measure of political risk by increasing cash and increasing spending on campaign contributions. Our findings point to a potential channel through which different jurisdictions experience the entrenchment and persistence of corruption.

Suggested Citation

  • Jayakody, Shashitha & Morelli, David & Oberoi, Jaideep, 2023. "Political uncertainty, corruption, and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 82(C).
  • Handle: RePEc:eee:corfin:v:82:y:2023:i:c:s0929119923000962
    DOI: 10.1016/j.jcorpfin.2023.102447
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    References listed on IDEAS

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    Cited by:

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    4. Wang, Ting & Xu, Jiani & Yang, Liuyong, 2024. "Financial geographic density and corporate financial asset holdings: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    Cash holdings; Local corruption; Influence; Political risk;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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