We examine how firms change their cash policies in response to the downfall of corrupt politicians in China. We find that firms connected to their local government increase cash holdings when high-profile politician downfalls occur in the government. Consistent with the precautionary saving argument, the effect is stronger for firms that have greater investment opportunities or face greater financial constraints. Compared to unaffected firms, affected firms save more cash out of cash flows and have a higher marginal value of cash holdings. Overall, we show that the collapse of firms' political connections has significant impacts on those firms' financial policies.
Bibliographical noteWe are grateful for comments from Jie Cai, George Jiang, Chen Lin, Cong Wang, Bohui Zhang, Hong Zhang, Hua Zhang, Kuo Zhang, and seminar participants at Asian Bureau of Finance and Economic Research 2016 Annual Conference, Asian Financial Association 2016 Annual Meeting, China Financial Research 2016 Conference, International Finance and Banking Society 2016 Barcelona Conference, and The Chinese University of Hong Kong. The research is sponsored by Shanghai Pujiang Program (No. 2019PJC013).
- Cash policy
- Political connections
- Politician downfalls