, Volume 42, Issue 1, pp 123-142
Date: 01 Jan 2013

Corporate cash holdings and political connections

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We examine the relation between corporate liquidity and political connections measured via lobbying expenditures. This is an interesting question as many of the motives for holding cash should be diminished by political connections. Results indicate a significant and inverse relation between cash levels and lobby expenses and that the marginal value of cash decreases with lobbying. Taken together, these findings suggest firms react optimally to the reduced benefits of cash linked to political connections and that the market recognizes the weakened benefits of cash. Overall, our research shows another way political connections can shape corporate policy.