Firm-Level Political Risk and the Cash Flow Sensitivity of Cash

Hui Liang James (), Hongxia Wang and Nilakshi Borah ()
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Hui Liang James: Soules College of Business, University of Texas at Tyler, 3900 University Blvd, Tyler, TX 75799, USA
Hongxia Wang: Department of Finance and Economics, E. Craig Wall Sr. College of Business, Coastal Carolina University, Conway, SC 29528, USA
Nilakshi Borah: College of Business Administration, University of Wisconsin-La Crosse, La Crosse, WI 54601, USA

Quarterly Journal of Finance (QJF), 2024, vol. 14, issue 01, 1-36

Abstract: We examine the impact of firm-level political risk on the cash flow sensitivity of cash. Using a large sample of U.S. firms from 2003 to 2018, we find that the cash flow sensitivity of cash decreases in political uncertainty and the impact of political risk is asymmetric to cash flow types (positive versus negative). Intensified political uncertainty induces positive/negative cash flow firms to reduce savings out of cash flows to finance investment opportunities/terminate unprofitable projects to retrieve cash. The results are robust to various model specifications, alternative variable definitions, and the control for non-political risks. In addition, we show that a firm’s financial status moderates the relation between the two, with financially constrained positive/negative cash flow firms saving more out of cash flows/decreasing existing savings as firm-level political risk increases.

Keywords: Firm-level political risk; cash flow sensitivity of cash; positive (negative) cash flow firms; financial constraints (search for similar items in EconPapers)
JEL-codes: G30 G32 G39 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S2010139224500046

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