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

Author

Listed:
  • Hankins, William

    (University of Alabama)

  • Cheng, Chak

    (University of South Carolina)

  • Chiu, Jeremy

    (Bank of England)

  • Stone, Anna-Leigh

    (Samford University)

Abstract

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.

Suggested Citation

  • Hankins, William & Cheng, Chak & Chiu, Jeremy & Stone, Anna-Leigh, 2016. "Does partisan conflict impact the cash holdings of firms? A sign restrictions approach," Bank of England working papers 638, Bank of England.
    • Handle: RePEc:boe:boeewp:0638
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2016/does-partisan-conflict-impact-the-cash-holdings-of-firms-a-sign-restrictions-approach.pdf?la=en&hash=4EDED9EDF1E93C7FF79793C01B4B45E0119E60F3
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    References listed on IDEAS

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    Cited by:

    1. Cai, Yifei & Wu, Yanrui, 2019. "Time-varied causality between US partisan conflict shock and crude oil return," Energy Economics, Elsevier, vol. 84(C).
    2. Mehmet Balcilar & Seyi Saint Akadiri & Rangan Gupta & Stephen M. Miller, 2019. "Partisan Conflict and Income Inequality in the United States: A Nonparametric Causality-in-Quantiles Approach," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 142(1), pages 65-82, February.

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    More about this item

    Keywords

    Partisan conflict; cash holdings; economic policy uncertainty; VAR; sign restrictions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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