How Political Risk Components Shape Corporate Cash Holdings

This study investigates how firm-specific political risk influences corporate cash holdings, focusing on its moderating role in the cash flow-cash relationship. Using panel data from U.S. publicly listed firms (2012–2021), we distinguish between expected and unexpected components of political risk and examine their differential effects on cash flow sensitivity. The empirical strategy employs heteroskedasticity-robust FGLS panel regressions supplemented by robustness checks using EPU measures, firm size subsamples, GMM, and instrumental variables. Findings reveal that while political risk increases cash holdings, it reduces cash flow sensitivity. Unexpected political risk notably amplifies this sensitivity, reflecting precautionary behavior under uncertainty. In contrast, expected political risk dampens it, indicating firms’ ability to plan for anticipated events. Effects are particularly pronounced among financially constrained firms. The study offers valuable implications for managers, regulators and investors. By highlighting contrasting effects of expected versus unexpected political risk, this research provides novel insights into corporate liquidity management determinants.