Liquid asset sheltering, or cost of capital? The effect of political corruption on corporate cash holdings

SeHyun Park

International Review of Financial Analysis, 2022, vol. 82, issue C

Abstract: I posit that political corruption affects firms through an entrenchment between entrepreneurs and politicians instead of coercive extortion. Based on this postulate, I refute the claim that firms in a more corrupt environment hold less cash due to liquid assets sheltering from political extraction. Instead, I propose that firms in a more corrupt environment hold less cash because of the high cost of capital. In fact, I find that firms in more corrupt countries hold cash beyond their optimum for the given cost of carry due to severe financial constraints. This excess cash results in value destruction. I call this phenomenon the financial effect of corruption. Thus, I challenge the conventional wisdom and argue that the effects of political corruption on corporate cash holdings are primarily indirect through financial mechanisms.

Keywords: Political corruption; cash holdings; Interest group theory of financial development; Twin-agency conflicts (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:82:y:2022:i:c:s1057521922001119

DOI: 10.1016/j.irfa.2022.102146

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