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Brown Bag Seminar Cash is king or trash? The review of political uncertainty and corporate behaviour
Speaker: Dr Kulnicha Meechaiyo, University of St Andrews
Abstract: Using the data on national elections and a comprehensive set of corporate data, this paper examines whether political uncertainty can affect companies' cash holdings and asset growth in eight Asian emerging economies. The analysis covers the period from 1990 to 2018. This study focuses on two significantly different electoral systems: a presidential or legislative electoral system (Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand and Taiwan), and an assembly-elected presidential electoral system (China). The two different national electoral systems can affect corporate behaviour differently. The cash flow sensitivity of cash during election periods is assessed by estimating panel models with fixed effects. In addition, this paper employs the first-difference Generalised Method of Moments technique to evaluate the impact of the availability of internal finance on asset growth during election periods. The line of discussion builds upon the motivation theory of cash holdings introduced by Keynes (1936) and the internal finance theory of growth. The findings show that the magnitude of cash holdings varies with the national electoral system adopted in the country and firm size. The findings also suggest that firms residing in a country with a presidential or legislative electoral system are more sensitive to political uncertainty than those residing in a country with an assembly-elected presidential electoral system. During election periods, firms residing in a country with a presidential or legislative electoral system tend to hold more cash during election periods due to being precautionary against the uncertainty that may occur. While large firms residing in a country with an assembly-elected presidential electoral system lessen a grabbing hand problem by holding a smaller amount of cash reserves, small firms in a country with a presidential or legislative electoral system tend to use internal funds to grow during election periods.