Political Conflict and Corporate Policies: Evidence from the Basque Country

François Derrien, Stavriana Hadjigavriel, Jose-Maria Martin-Flores and Arthur Romec
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François Derrien: HEC Paris - Ecole des Hautes Etudes Commerciales
Stavriana Hadjigavriel: CUNEF Universidad
Jose-Maria Martin-Flores: CUNEF Universidad
Arthur Romec: TBS - Toulouse Business School

Working Papers from HAL

Abstract: This paper examines how political conflict affects corporate policies focusing on the Spanish Basque Country. We exploit the announcement by the Basque nationalist terrorist group ETA of the definitive cessation of its armed and extortion activities as an exogenous shock to the exposure of firms in the Basque Country and Navarre to extortion risk. We find that, following the announcement, firms in these regions significantly increase their cash holdings and exhibit higher cash flow sensitivity of cash. They also reduce investment in fixed assets and rely less on short-term debt, consistent with a shift away from strategic liquidity minimization under extortion risk. Finally, firm performance improves. Overall, the results suggest that political conflict distorts cash management, financing choices, and investment decisions.

Keywords: Cash holdings; Political conflict; Revolutionary tax; Corporate policies (search for similar items in EconPapers)
Date: 2025-12-01
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05562708

DOI: 10.2139/ssrn.5838642

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