Political uncertainty, corruption, and corporate cash holdings

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.

Citation

Jayakody, S., Morelli, D., & Oberoi, J. (2023). Political uncertainty, corruption, and corporate cash holdings. Journal of Corporate Finance, 82, Article 102447. https://doi.org/10.1016/j.jcorpfin.2023.102447

• Journal Article Type: Article
• Acceptance Date: Jun 23, 2023
• Online Publication Date: Jul 5, 2023
• Publication Date: Oct 1, 2023
• Deposit Date: Aug 21, 2023
• Publicly Available Date: Aug 21, 2023
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Electronic ISSN: 1872-6313
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 82
• Article Number: 102447
• DOI: https://doi.org/10.1016/j.jcorpfin.2023.102447
• Keywords: Cash holdings, Local corruption, Influence, Political risk
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0929119923000962
• Additional Information: Data Access Statement : The authors do not have permission to share data.