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Political Conflict and Corporate Policies: Evidence from the Basque Country

Author

Listed:
  • Derrien, François

    (HEC Paris - Finance Department)

  • Hadjigavriel, Stavriana

    (CUNEF University)

  • Martin-Flores, Jose M.

    (CUNEF University)

  • Romec, Arthur

    (Toulouse Business School)

Abstract

This paper examines how political conflict affects corporate policies focusing on the Spanish Basque Country. We exploit the announcement by the Basque nationalist terrorist group ETA of the definitive cessation of its armed and extortion activities as an exogenous shock to the exposure of firms in the Basque Country and Navarre to extortion risk. We find that, following the announcement, firms in these regions significantly increase their cash holdings and exhibit higher cash flow sensitivity of cash. They also reduce investment in fixed assets and rely less on short-term debt, consistent with a shift away from strategic liquidity minimization under extortion risk. Finally, firm performance improves. Overall, the results suggest that political conflict distorts cash management, financing choices, and investment decisions.

Suggested Citation

  • Derrien, François & Hadjigavriel, Stavriana & Martin-Flores, Jose M. & Romec, Arthur, 2025. "Political Conflict and Corporate Policies: Evidence from the Basque Country," HEC Research Papers Series 1600, HEC Paris, revised 18 Dec 2025.
    • Handle: RePEc:ebg:heccah:1600
    DOI: 10.2139/ssrn.5838642
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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