Hasan, Shehub Bin, Alam, Md Samsul, Paramati, Sudharshan Reddy and Islam, Md Shahidul (2022) Does firm-level political risk affect cash holdings? Review of Quantitative Finance and Accounting, 59. pp. 311-337. ISSN 0924-865X

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Abstract

We investigate whether firm-level political risk affects corporate cash holdings. Taking a sample of 5,424 US firms with 129,750 firm-quarter observations from 2002Q1 to 2021Q3, we find that cash holdings is higher for firms with greater exposure to firm-level political risk. The positive relationship between firm political risk and cash holdings is consistent for financial constraint and non-constraint firms, high and low growth firms, pro-cyclical and counter-cyclical and competitive industries. Further, our findings are consistent to alternative measures of firm-level political risk and cash holdings. In addition, our findings remain robust with different endogeneity tests: a natural experiment, an instrumental variable approach, and a propensity score matching. Overall, we present novel evidence on the determinants of corporate cash holdings.

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