Corporate Cash and Political Uncertainty
62 Pages Posted: 3 Jan 2018 Last revised: 15 Dec 2020
Date Written: December 15, 2020
How does political uncertainty aﬀect ﬁrms’ saving? We incorporate election uncertainty into a dynamic model of ﬁrm investment and saving. Our model predicts that ﬁrms build up pre-election cash balances and, because cost of capital is high when uncertainty is high, begin to rely on this cash before elections resolve uncertainty. We ﬁnd strong support for our predictions in our data and show that ﬁrms save an extra quarter’s worth of cash before elections. This saving reﬂects substantial heterogeneity in ﬁrms’ available sources of funding, so that changes to no one source of cash explains ﬁrms’ aggregate pre-election saving. Firms that can cheaply raise internal funds by, for example, retaining cash ﬂow or decreasing payout do so. Other ﬁrms that rely on external equity markets to raise cash adjust the timing and magnitude of issuances to avoid higher ﬁnancing costs around elections. Their willingness to rely on expensive equity issuance before elections is evidence of the importance of political uncertainty to ﬁrms’ saving decisions.
Keywords: corporate saving, cash, political uncertainty, gubernatorial elections, economic policy uncertainty
JEL Classification: D72, G31, E21
Suggested Citation: Suggested Citation