Corporate Decision-Making in the Presence of Political

Uncertainty: The Case of Corporate Cash Holdings*

William B. Hankins„ Anna-Leigh Stone… Chak Hung Jack Cheng§
Ching-Wai (Jeremy) Chiu¶
March 23, 2018

Abstract
We use a quarterly panel of U.S. corporations over the period 1985 – 2014 to show that an unantic-
ipated shock to political uncertainty leads managers to increase cash holdings by as much as 27 basis
points four quarters following the shock. We proxy for political uncertainty using the Partisan Conflict
Index and employ a prevalent empirical macroeconomic methodology to construct structural shocks that
are orthogonal to shocks captured by the Economic Policy Uncertainty Index. Additionally, financially
constrained firms, and small firms in particular, experience a larger increase in cash holding following a
partisan conflict shock compared to financially unconstrained firms.

Key Words: Cash Holdings, Economic Policy Uncertainty, SVAR, U.S. Partisan Conflict

* The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Bank of England,
Monetary Policy Committee, Financial Policy Committee, or Prudential Regulatory Authority Board. All errors are the sole
responsibility of the authors.
„ Corresponding author. Assistant Professor of Economics, Department of Finance, Economics, and Accounting, School
of Business and Industry, Jacksonville State University, 700 Pelham Road North, Jacksonville, Alabama 36265, USA.
Email:whankins@jsu.edu. Phone: 256-782-5392. Fax: 256-782-5312.
… Assistant Professor of Finance, Department of Economics, Finance, and Quantitative Analysis, Brock School of Business,
Samford University, 800 Lakeshore Drive, Birmingham, AL 35229, USA. Email: alstone@samford.edu. Phone: 205-726-4644.
Fax: 205-726-2464.
§ Assistant Professor of Economics, George Dean Johnson, Jr. College of Business and Economics, University of South
Carolina Upstate, 160 East St. John Street, Spartanburg, SC 29306, USA. Email: jcheng@uscupstate.edu. Phone: 864-503-
5510. Fax: 864-503-5583.
¶ Bank of England, Threadneedle Street, London, United Kingdom EC2R 8AH. Email: jeremy.chiu@bankofengland.co.uk.

Electronic copy available at: https://ssrn.com/abstract=3147902

1 Introduction

In June 2016, seventy-nine percent of the chief financial officers (CFOs) responding to the CFO Outlook

Survey stated that the U.S. faced “moderate-to-severe” political risk (J. Graham, 2016). Forty-seven percent

of CFOs also indicated that they would limit their business’s spending due to heightened political uncertainty.

In 2013, half of all chief executive officers (CEOs) responding to the Business Roundtable’s CEO Economic

Outlook Survey claimed that political disagreement within the federal government over the upcoming budget

negotiations and the looming debt ceiling crisis was likely to have an adverse effect on their short-term hiring

decisions. Recent public news reports document similar anecdotes about how political uncertainty impacts

business decisions. For example, Howard Shultz, the former CEO of Starbucks, sent a well-publicized memo

to employees urging better customer service in the face of, amongst other issues, “great political uncertainty

both at home and abroad (Harwell, 2015).” Jamie Dimon, the CEO of JPMorgan Chase, has discussed his

concern regarding uncertainty over health care, immigration, and infrastructure policy (Dimon, 2015). These

issues, particularly the first two, have elicited contentious partisan debate amongst members of Congress in

recent years.

Given the anecdotal evidence, this paper directly addresses whether a rise in political uncertainty impacts

corporate cash holdings. Corporations hold cash for a variety of reasons, one of which is to serve as a buffer

against negative shocks that could affect future cash flows.1 For example, if corporate managers anticipate

that heightened partisan conflict would lower the probability that the government could effectively respond

to an unanticipated negative economic shock, they might direct their firms to hold more assets as cash rather

than continue with normal business practices.

We note that the estimation of political uncertainty is complicated by the existence of economic policy

uncertainty. In this paper, our measure of political uncertainty is based on the Partisan Conflict Index

(hereafter referred to as the PC Index) first introduced in Azzimonti (2014). Our measure of economic

policy uncertainty is based on the news-based Economic Policy Uncertainty Index (hereafter referred to as

the EPU Index), developed by Baker, Bloom, and Davis (2016). Although similar in construction, the PC

Index is distinct from the EPU Index. For example, the EPU Index does not distinguish between increased

uncertainty triggered by a political event and uncertainty triggered by monetary policy. In addition, there

can be instances where economic policy uncertainty is low, but partisan conflict is high, leading investors

and managers to still alter their behavior. For example, Azzimonti (2014) distinguishes between uncertainty

about the types of policies the government might adopt, or whether they will adopt a meaningful policy
1 See Opler, Pinkowitz, Stulz, and Williamson (1999), Almeida, Campello, and Weisbach (2004) and Han and Qiu (2007).

Electronic copy available at: https://ssrn.com/abstract=3147902

at all, and uncertainty over the effects of policies that have already been adopted. Uncertainty over which

policies will or might be adopted stems from political uncertainty. Conversely, uncertainty regarding the

effects of existing policy stems from economic policy uncertainty.2 There is also the possibility that political

uncertainty can have an effect on economic policy uncertainty. For example, Azzimonti (2014) and Azzimonti

(2018) point out that heightened political uncertainty can lead to higher economic policy uncertainty.

To construct structural political uncertainty shocks that are orthogonal to those of economic policy un-

certainty, we follow the macroeconomic literature by estimating a structural vector autoregression model

(SVAR). Since Sims (1980), vector autoregressions have become a common tool to study dynamical rela-

tionships between variables. Stock and Watson (2001) stress that SVARs require identifying assumptions

in order to allow correlations to be interpreted causally. We adopt the recursiveness assumption which is

widely used by researchers such as Christiano, Eichenbaum, and Evans (1999) and Christiano, Eichenbaum,

and Evans (2005) and Bloom (2009), among many others. By constructing shocks that are orthogonal to

one another, we have additional confidence that partisan conflict shocks are not contaminated by shocks to

economic policy uncertainty (and vice versa) or other macroeconomic variables used in the SVAR model.

We then test the relationships between these shocks and corporate cash holdings using data from Compustat

Quarterly File for all non-financial and non-utility U.S. firms over the period 1985Q1 – 2014Q4.

We reach several findings of particular note. First, we provide robust empirical evidence that corporate

managers shift an economically significant amount of assets into cash and cash equivalents during periods of

heightened political uncertainty, for four quarters after the shock. More specifically, a partisan conflict shock

similar to what the U.S. experienced during 2010, when the Affordable Care Act was signed into law, would

result in an increase in the cash ratio of a little more than 27 basis points, representing a 1.56% rise in average

cash-to-total assets. These findings complement Azzimonti (2018), who shows a direct relationship between

heightened partisan conflict and a reduction in corporate capital investment. However, as pointed out by

Alfaro, Bloom, and Lin (2016), during periods of heightened uncertainty, not only do corporate managers

have the incentive to reduce investment, but the existing uncertainty also gives managers the incentive to

increase cash holdings, potentially leading to a further reduction in investment. It is important to point out

the direct impact on cash holdings because it highlights that the increase in cash holdings is not merely a

mechanical consequence of reducing investment.

Second, we analyze how various subsamples of firms react to a partisan conflict shock. While both fi-

nancially constrained and unconstrained firms appear to increase cash holdings following a partisan conflict
2 Previous research such as Pastor and Veronesi (2012) also shows that political uncertainty and impact uncertainty, which

could be triggered by economic policy uncertainty, are theoretically and empirically different.

3
shock, the strongest evidence indicates that small firms, which are considered financially constrained, in-

crease cash-to-total assets by significantly more than large firms. This finding reveals the possibility of a

precautionary motive with respect to partisan conflict. Other tests reveal that all firms, regardless of the

political sensitivity of their industry or the degree to which their industry utilizes irreversible investments,

increase cash-to-total assets following a partisan conflict shock.

In contrast, we find inconsistent estimates regarding the impact of an economic policy uncertainty shock

on corporate cash holdings four quarters after the initial impact of such a shock. We also find that large

and financially unconstrained firms are likely to experience an increase in cash-to-total assets following an

economic policy uncertainty shock, whereas small and financially constrained firms are likely to experience

either no change or a decrease in cash-to-total assets following this shock. This finding is possibly explained

by the different types of uncertainty measured by the PC and EPU Indexes, differences in the types of events

that trigger each type of uncertainty, and differences in cash management and investment decisions between

financially constrained and unconstrained firms.3

Our findings highlight several contributions to the literature. First, we provide robust evidence that

heightened political uncertainty is associated with a significant increase in corporate cash holdings, which

can have direct policy implications. In addition, we show a relatively straightforward way in which researchers

can separately quantify and distinguish the impact of economic policy uncertainty from political uncertainty

arising from partisan conflict. In recent years, the EPU Index has been a standard measure of political

uncertainty. Using this measure, researchers have studied the effects of political uncertainty on bank loan

contracting (Francis, Hasan, and Zhu, 2014), corporate debt financing (Waisman, Ye, and Zhu, 2015),

and investment decisions (Gulen and Ion, 2015). However, our methodology of constructing orthogonal

structural shocks from a structural VAR enables researchers to reevaluate these relationships by accounting

for endogeneity between these two types of uncertainty. Finally, the use of the PC Index also distinguishes

this paper from those such as Julio and Yook (2012), who use election dates to proxy for political uncertainty.

By using the PC Index, we have the ability to proxy for political uncertainty during non-election years. Our

results provide evidence that the PC Index is an important proxy for political uncertainty that should be

incorporated into the finance literature.

These findings extend a growing literature examining the consequences of US partisan conflict (see Azz-

imonti (2014), Azzimonti (2018), Cheng, Hankins, and Chiu (2016), and Gupta, Lau, Miller, and Wohar

(2017)). Some economists believe that the slow recovery from the Great Recession can be explained, in part,
3 See Section 5 for a more detailed discussion.

4
by a higher degree of uncertainty. In fact, recent survey evidence indicates that greater political uncertainty

has “[led] to planned business spending increases of only 1% in the United States”(J. Graham, 2016). Our

empirical results support the hypothesis that shocks to political uncertainty raise the cash holdings of U.S.

firms, which may have prolonged the weak recovery from the Great Recession. These insights reveal the

importance of good policy and the broader signaling effects of political dysfunction. Moreover, these re-

sults should also indicate to managers and policymakers that the consequences of partisan conflict can be

detrimental even when economic policy uncertainty is low.

In Section 2 we discuss several strands of literature related to this paper, along the way pointing out

where we believe this paper makes a contribution. In Section 3 we discuss the construction of the SVAR

model used to recover the partisan conflict and economic policy uncertainty shocks and the primary regression

specification used to estimate the relationship between cash holdings and the uncertainty shocks. The results

from this paper are split into two sections. In Section 4 we present and discuss the primary results and in

Section 5 we provide and discuss the results from regressions using various subsamples of firms. In Section 6

we conduct several robustness checks. In the first robustness check, we control for the post-2008 period,

which is associated with recovery from the financial crisis as well as episodes of excessive partisan conflict

and economic policy uncertainty. The second robustness check replaces the traditional measure of cash

holdings, cash-to-total assets, with an alternative measures that scales cash holdings by a firm’s total assets

minus cash. We also report results using alternative specifications of the structural VAR model. Finally,

Section 7 concludes.

2 Literature Review

This paper is related to three strands of literature. First, this paper is related to a growing literature, both

theoretical and empirical, explaining how political uncertainty and political polarization affect investment

decisions. The impact of political uncertainty on investment has received, by far, the most attention.

Azzimonti (2011) develops a model showing how political polarization and political instability can lead to

higher relative investment-to-consumption prices and thus a lower level of aggregate private investment.

Azzimonti (2015) further develops a model in which she shows that private investment will decline when

partisan conflict within the U.S. government is high. Specifically, when partisan conflict is relatively high,

investors and consumers may worry that politicians will be less likely to formulate timely and appropriate

policy responses that can reduce the risk of costly rare events. Cautious investors will reduce investment

5
spending until such a time that partisan conflict subsides and those in government can create and pass

effective policies. Canes-Wrone and Park (2012) show evidence of what they termed a “reverse electoral

business cycle (ibid: p. 103).” Using a panel of ten OECD countries, they show that a decline in real

private fixed investment occurs during electoral cycles that are associated with a high degree of economic

policy uncertainty. These cycles are even more pronounced when political polarization is relatively high. In

their model, investments that may entail either sunk or hard-to-reverse costs could be delayed if investors’

expectations about the effectiveness of economic policy become more uncertain. Along with Azzimonti

(2011) and Azzimonti (2015), Canes-Wrone and Park (2012) provide clear theoretical predictions regarding

how partisan conflict and political polarization should impact investment spending. However, both Azzimonti

(2011) and Canes-Wrone and Park (2012) focuses on private fixed investment at the country level and do

not consider how political uncertainty impacts decision-making at the corporate level.

In addition to her theoretical work, Azzimonti (2018) introduces the Partisan Conflict Index, the index

adopted in this paper, and uses both VAR and panel regression techniques to show that a doubling of partisan

conflict is associated with a decline in corporate investment of between 0.098 standard deviations and 0.102

standard deviations. Azzimonti’s model is similar to that of Gulen and Ion (2015), discussed below, with the

exception that she includes both PCI and the Economic Policy Uncertainty Index. Interestingly, when using

the news-based EPU Index, Azzimonti finds that the impact of partisan conflict on corporate investment is

larger in magnitude than the impact of economic policy uncertainty. Importantly, as Azzimonti points out,

her finding reveal that partisan conflict can have a first moment impact on corporate decision-making rather

than simply through a second order effect. While our paper will also focus on the corporate decision-making,

there are two important differences. First, we limit our focus to how partisan conflict impacts corporate

cash holdings. In doing so, we can devote more analysis to how partisan conflict impacts firms with different

levels of financial constraint. Moreover, as Alfaro, Bloom, and Lin (2016) show, theoretically, firms are

incentivized to both reduce investment and raise cash holdings in the face of uncertainty shocks. In other

words, the increase in cash holdings is not merely a mechanical result of a firm also reducing investment.

More importantly, though, we attempt to disentangle the potential endogeneity between the Partisan Conflict

Index and the Economic Policy Uncertainty Index.

Julio and Yook (2012) use the timing of elections, as well as the margin of victory in elections, to measure

how political uncertainty impacts investment cycles. Using a panel of firms from forty-eight countries, they

find that firms reduce investment spending by 4.8% in election years compared to non-election years. The

use of firm-level financial data allows them to control for firm-specific characteristics that could be correlated

6
with episodes of political uncertainty. However, it is important to distinguish the PC Index from the proxies

used in Julio and Yook (2012). While the PC Index also measures an increase in political uncertainty around

election years, it has two advantages. First, it can measure partisan conflict during non-election years. For

example, the PC Index can capture the partisan conflict surrounding the government shutdown of 2013,

which occurred during a non-presidential election year. Second, the rich variation in the PC Index can

distinguish politically contentious election years from those that were relatively calm. For example, the PC

Index shows that partisan conflict was much higher during the November 2012 presidential election compared

to the November 2000 presidential election. However, despite the relatively higher level of partisan conflict

during the 2012 election, the margin of victory was 3.86 percentage points compared to the close election

of November 2000, when the margin of victory was less than one percentage point. Thus, higher political

uncertainty does not always correspond to close elections.

This paper also concerns disentangling the political uncertainty from economic policy uncertainty. The

PC Index differs from the well-known Economic Policy Uncertainty (EPU) Index developed by Baker, Bloom,

and Davis (2016). While both indexes are constructed using newspaper search algorithms, each searches

different key terms. For example, Azzimonti (2018) notes that her algorithm does not search for words

directly related to economic policy, but instead searches for words directly related to political disagreement.

Moreover, she shows that the PC and EPU Indexes do not necessarily co-move. For example, immediately

following the September 11th terrorist attacks, economic policy uncertainty was quite high. However, partisan

conflict was low because most politicians had rallied around a common goal. Similarly, following the Lehman

failure, the EPU Index exhibited a stark increase while the PC Index was relatively stable. Conversely, when

partisan conflict is exceptionally high, economic policy uncertainty is relatively low, because economic agents

are fairly certain that the status quo will persist.

The corporate finance literature has made quick use of the EPU Index in order to understand how

corporate managers react during periods of high policy uncertainty. However, with the exception of Azzimonti

(2018), none have attempted to separately quantify the impact of policy uncertainty from the impact of

political uncertainty. One recent paper, Gulen and Ion (2015), analyzes the impact of policy uncertainty on

corporate investment, as opposed to aggregate private investment, while also controlling for election periods,

allowing them to estimate the impact of economic policy uncertainty in non-election years. They find strong

evidence of an inverse relationship between increases in the Economic Policy Uncertainty Index and firm-

level capital investments. Our primary regression model is based on Gulen and Ion (2015). Like them, we

make use of the EPU Index and account for presidential election years. A notable difference, though, apart

7
from the use of the PC Index and the focus on cash holdings, is that we will not proxy for economic policy

uncertainty using the EPU Index directly, rather, we will use constructed economic policy uncertainty shocks

that are orthogonal to partisan conflict shocks.

Second, our paper is closely related to the broad literature on the cash holdings practices of firms, an

active research area ever since the seminal study on the determinants of corporate cash holdings by Opler,

Pinkowitz, Stulz, and Williamson (1999). Since the introduction of this research, corporate cash holdings have

experienced astounding growth. Bates, Kahle, and Stulz (2009) examine how well the prevailing theories of

corporate cash holdings could explain the increase in cash holdings that they document as occurring between

1980 and 2006. Of these theories, they showed that firms have increased cash as a percentage of assets for

precautionary reasons. Keynes (1936) first discussed the possibility of a precautionary motive of firm-level

cash holdings. Further evidence for this theory is provided in Opler, Pinkowitz, Stulz, and Williamson

(1999), Almeida, Campello, and Weisbach (2004) and Han and Qiu (2007). Simply put, the precautionary

motive asserts that firms will hold more cash in order to buffer against adverse shocks, both idiosyncratic

and aggregate, particularly when access to external capital is costly.4

Within the cash holdings literature, there have been several studies concerned with how corporate cash

holdings are impacted by idiosyncratic (firm-specific) uncertainty and aggregate (macroeconomic) uncer-

tainty. Baum, Caglayan, Ozkan, and Talavera (2006) showed that the dispersion of cash-to-total assets

decreased in the presence of macroeconomic uncertainty for all firms in their sample, as well as for finan-

cially constrained firms and high-growth firms. Financially constrained firms, having restricted access to

outside capital sources, tend to hold more cash compared to financially unconstrained firms. High-growth

firms tend to be relatively young firms and have not been able to build up alternative sources of investment

capital. Our paper is closely related to Baum, Caglayan, Stephan, and Talavera (2008), who estimated how

these types of uncertainties impacted the cash-to-assets ratio of manufacturing firms. Overall, the authors

found that heightened macroeconomic uncertainty was associated with an increase in the proportion of assets

held as cash. The authors also investigated several subsamples of firms, including small and large firms, and

high-growth and low-growth firms. Interestingly, the findings revealed that small firms were statistically

unresponsive to aggregate macroeconomic uncertainty shocks whereas larger firms exhibited an increase in

cash-to-total assets. Khieu and Pyles (2012) find that firms impacted by a credit downgrade, an idiosyn-

cratic shock, increase excess cash-to-total non-cash assets by 3% compared to firms that did not experience
4 Brown and Petersen (2011) and Pinkowitz, Stulz, and Williamson (2012) also pointed out that uncertainty related to

research and development can cause firms to hold relatively more liquid assets. However, Atanassov, Julio, and Leng (2016)
provide evidence that some R&D investment might increase during election periods.

8
a significant credit downgrade. Recently, J. R. Graham and Leary (2017) have undertaken an exhaustive

analysis of corporate cash holdings, using close to a century’s worth of data from a variety of sources. They

find no statistically significant evidence of a positive correlation between the Economic Policy Uncertainty

Index and cash-to-total assets. Unlike J. R. Graham and Leary (2017), we are interested in how firm-level

cash holdings respond not just to economic policy uncertainty, but also to partisan conflict.

Gao, Grinstein, and Wang (2014) use a GARCH model to estimate how systematic uncertainty translates

to firm-specific uncertainty of liquidity needs and firm-specific uncertainty of access to external financing.

They find that shocks to both types of uncertainty lead to increases in a firm’s cash ratio. The results in

Gao, Grinstein, and Wang (2014) complement evidence from Acharya, Almeida, and Campello (2013), who

showed that firms facing greater aggregate risks will choose to hold more cash rather than take out costlier

lines of credit with banks. A recent paper by Alfaro, Bloom, and Lin (2016) makes an important point about

how uncertainty can impact cash holdings directly, in addition to the impact on investment. They note that

heighten uncertainty can prompt managers to reduce investment through a negative real-options strategy.

However, uncertainty can also lead managers to reduce cash in order to buffer against future adverse shocks.

Azzimonti (2018) shows how heightened partisan conflict can reduce capital investment via this negative

real-options channel. Our results will highlight this point made by Alfaro, Bloom, and Lin (2016) and

complement Azzimonti’s evidence by showing how partisan conflict and economic policy uncertainty shocks

also increase cash holdings.

Our paper makes its largest contribution to the cash holdings literature by investigating the impact

of political uncertainty on corporate cash holdings. Julio and Yook (2012), along with their analyses on

investment cycles, estimate how cash holdings are correlated with election years. Interestingly, they find

that election years were associated with an increase in cash held as a percentage of total assets as well as

with a decline in investment spending as a percentage of total assets. Thus, they provide evidence that cash

holdings should increase around periods typically correlated with political uncertainty. However, the source

of the uncertainty, i.e. political or policy uncertainty, is not known. Bhagat and Obreja (2013) link cash flow

uncertainty to depressed corporate investment, even when the cost of capital is low and attractive investment

opportunities exist. The authors cite uncertainty over the implementation of the Affordable Care Act, as

well as uncertainty regarding U.S. fiscal policy, as potential reasons for why corporate managers would delay

investment spending in the face of reasonable opportunities. Our findings complement those of Julio and

Yook (2012) by providing estimates of how cash holdings are related to political uncertainty in non-election

years.

9
 Finally, we are helping to clarify the literature on political uncertainty and financial decision-making.

Francis, Hasan, and Zhu (2014) and Waisman, Ye, and Zhu (2015) study the effects of policy uncertainty

on corporate bank loan contracting and debt financing, respectively, by making use of the Economic Policy

Uncertainty Index.5 Francis, Hasan, and Zhu (2014) show that elevated political uncertainty can be incor-

porated into bank loan pricing. Thus, not only can bank loans be harder to obtain during periods of high

political uncertainty, but they can also be more expensive to take out. This last point relates closely to our

paper, because it reveals a channel through which firms may increase cash. That is, if external financing is

costlier during periods of high partisan conflict, firms may choose to keep more of their total assets in the

form of cash. Waisman, Ye, and Zhu (2015) show that political uncertainty is associated with an increase in

corporate bond spreads, making the cost of debt financing more expensive. Waisman, Ye, and Zhu (2015)

adopt a strategy similar to Gulen and Ion (2015) and combine the use of election years, margin of victory

and the EPU Index to proxy for political uncertainty. However, in this section we have demonstrated that

each of these proxies cannot measure elements of political uncertainty directly related to partisan conflict.

Thus, a contribution to this literature is our evidence that the PC Index is an important, and fundamentally

different, proxy for political uncertainty that should be incorporated into the finance literature.

Through the review of the literature presented in this section we have highlighted multiple channels

through which partisan conflict can impact corporate cash holdings:

ˆ Firms have a precautionary motive for holding proportionally more cash if they believe that partisan

conflict will limit the availability and raise the price of external financing.

ˆ Finally, if firms perceive partisan conflict to be long-lasting, then the belief that politicians will be

unable to mitigate costly rare events can be exacerbated. This belief might lead them to question the

availability of profitable investments in the future. A preference for cash in the face of uncertainty over

future investments is consistent with the model discussed in Almeida, Campello, and Weisbach (2011)

and Alfaro, Bloom, and Lin (2016).

These potential channels lead us to believe that, holding other things constant, heightened partisan

conflict should lead firms to hold relatively more of their assets as cash. In the next section, we will describe

the methodology and data used to test this and other hypotheses related to political uncertainty and cash

holdings.
5 While a major theme of our paper is that policy and political uncertainty are different, both conceptually and as each

relates to corporate cash management, Francis, Hasan, and Zhu (2014), Waisman, Ye, and Zhu (2015), and others who use
the EPU Index often reference “political uncertainty” when discussing their findings rather than “policy uncertainty.” When
discussing the works of these authors, we will use their terminology.

10
3 Methodology

As we mentioned in Section 1, there are reasons to believe that heightened political uncertainty might

lead to heightened economic policy uncertainty. Furthermore, the PC Index and the EPU Index, while

both representing aggregate uncertainties, are fundamentally different. Thus, it is important to make every

attempt to ensure these shocks are identifiable from one another. We will first discuss the procedure used to

estimate exogenous partisan conflict and economic policy uncertainty shocks and then discuss the empirical

model that will be used to estimate the impact of these shocks on corporate cash holdings.

3.1 Estimation of Political and Economic Policy Uncertainty Shocks

Since Sims (1980), vector autoregression have become the standard tool in the macroeconomic literature to

study dynamical relationships between variables. In order to remove any potential endogeneity between the

two types of uncertainty and to conduct causal inference, we need to impose identifying assumptions, as

stressed by Stock and Watson (2001). We adopt the popular recursiveness assumption (cholesky decompo-

sition) as our identification strategy. This assumption is widely used in the macroeconomics literature, as

manifested by Christiano, Eichenbaum, and Evans (2005) who study the impact of monetary shocks, and by

Bloom (2009) who study the impact of economic policy uncertainty shocks.6

We estimate a VAR model which consists of five variables with the following baseline ordering: Partisan

Conflict Index (P Ct ), news-based Economic Policy Uncertainty Index (EP Ut ), U.S. Real Gross Domestic

Product (GDPt ), U.S. Private Investment (It ), and the U.S. Federal Funds Rate (F F Rt ). We use quarterly

U.S. data over the period 1985Q1 to 2014Q4, and estimate our model with four lags.7 All variables are

expressed in log values, except for the federal funds rate. The starting date for our data is based on the

availability of the EPU Index, which was developed by Baker, Bloom, and Davis (2016), and is retrieved

from the “Economic Policy Uncertainty” website.8 The PC Index is available from the Philadelphia Federal

Reserve Bank.910 U.S. Private Investment, which is deflated using the GDP deflator, US Real Gross Domestic
6 Azzimonti (2018) claims that the use of a VAR model with Cholesky decomposition does not address the issue of causality.

However, while this might be true about VARs without any identification schemes per se, the macroeconomic literature generally
recognizes that appropriately ordering the variables in the VAR system and performing Cholesky decomposition allows one to
identify the VAR and make causal claims.
7 The AIC criteria lie within a small range of -23.07 and -22.86 for the model estimated with two, three, and four lags,

respectively, rendering the choice of lag length difficult. This is reminiscent of Walentin (2014) who points out that the lag
length selection for VAR models tends to be difficult. Having considered the high persistence of the PC Index and the need to
properly model the dynamical relationships between uncertainties and the economy, we adopt four lags as our baseline model.
Our results are robust to the more parsimonious two-lag model, the results of which are discussed in Section 6.3 and reported
in the appendix.
8 http://www.policyuncertainty.com.
9 https://www.philadelphiafed.org/research-and-data/real-time-center/partisan-conflict-index.
10 The overall EPU Index consists of a component based on newspaper coverage, a component based on provisions of the

11
Product and the U.S. Federal funds Rate are both taken from the Federal Reserve Bank of St. Louis. Our

chosen ordering implies that structural PC shocks can affect economic policy uncertainty and other real

variables but not the other way round. Additionally, the use of quarterly data helps justify the ordering

of the PC and EPU Indexes. As Azzimonti (2018) makes clear, at a higher frequency, changes to the

PCI are caused by factors such as political polarization and elections. While it is possible that economic

policy uncertainty might generate political uncertainty over a period of a year or more, it is less likely when

measuring these variables at a quarterly frequency.

We argue that our baseline recursiveness assumption is a reasonable identification strategy. As is widely

known, the ordering of variables matters for the recursiveness assumption. To identify policy uncertainty

shocks, we follow Bloom (2009) and Baker, Bloom, and Davis (2016) by putting the EPU Index before the

macroeconomic variables. They argue that uncertainty shocks should be able to impact quantities and prices

instantaneously.

To differentiate EPU shocks from PC shocks, we assume that the former does not affect political dis-

agreement within the same period; in other words, shocks to EPU are assumed not to change PC on impact.

This follows directly from the theoretical predictions of Azzimonti (2014), who shows that partisan conflict

tends to increase during election periods and in response to political polarization, which may in turn lead

to increase in policy uncertainty. Our assumption that shocks to EPU does not affect PC on impact is also

motivated by two observations:

ˆ First, Azzimonti (2018) discusses that EPU shocks generally leaves PC unaffected during the current

period. The recent financial crisis serves as an example. The underlying causes that triggered an

EPU shock had little to do with current period politics. However, when politicians afterwards start

debating financial regulation meant to prevent another crisis (e.g. the various versions of The Federal

Reserve Transparency Act that have been brought before the US Congress or the Dodd-Frank Wall

Street Reform and Consumer Protection Act) or when there is significant disagreement between elected

officials regarding interest rate policies set by the Federal Reserve, Partisan Conflict can be higher.

ˆ Second, totally exogenous events like wars or terrorist events can trigger spikes in economic policy

uncertainty without causing much change in partisan conflict. The reason is that politicians may be in

general agreement about what the appropriate policy response should be. For example, after the Sept.

11th attacks, when EPU spiked, politicians in both parties generally agreed that increased security
federal tax code that are set to expire over the ensuing decade, and a component based on the disagreements of economic
forecasters. However, to stay consistent with the news-based PC Index, we will employ the news-based EPU Index.

12
 at airports and military actions in Afghanistan were appropriate policy responses. Afterwards, policy

disagreements stemming from these shocks have become more contentious.

In the appendix, we report results using several alternative specifications.11 Our baseline results remain

robust.12

– Insert Figure 1 Here –

Figure 1 shows the PC and EPU shocks that are recovered from the four-lag SVAR model. The shocks

are standardized to have a mean of zero and a standard deviation of one. The largest shocks in each series

correspond to periods of relatively high political and economic policy uncertainty. For example, the largest

EPU shock occurs during the third quarter of 1987, when the U.S. experienced the “Black Friday” stock

market crash, which was more than three standard deviations above the mean. In more recent years, the

largest EPU shock was approximately three standard deviations above the mean and occurred during the

third quarter of 2011, the same quarter in which the U.S. Congress was required to raise the debt ceiling.

The largest PC shock occurs during the first quarter of 2010, when President Barack Obama signed the

Affordable Care Act into law. This shock is more than two standard deviations above the mean.

3.2 Baseline Empirical Model

We estimate the impact of political and economic policy uncertainty shocks on corporate cash holdings using

the following baseline regression specification:

Cash-to-Total Assetsi,t+q = β1 PC Shockt + β2 EPU Shockt + β3 Presidential Electiont

(1)
+ γXi,t + µWt + CQTRt + FQTRt + αi + i,t+q .

Firms are indexed with the subscript i, calendar quarters are indexed with the subscript t, and q ∈

1, 2, 3, 4. Thus, our focus is on how cash-to-total assets responds to a PC shock one, two, three, and
11 These include: 1) a FA-SVAR with P C ordered second and EP U ordered third; 2) a SVAR where P C and EP U are
t t t t
ordered fourth and fifth, respectively; and 3) a SVAR where EP Ut and P Ct are ordered first and second, respectively.
12 One may be tempted to look for identification strategies by studying the empirical properties between EPU and PC.

Table 1 in the appendix documents the unconditional lead-lag cross-correlations, where we find that current EPU is positively
correlated with future PC up to 4 leads, and current PC is also positively correlated with future EPU up to 4 leads, with
the contemporaneous correlation standing at 0.34. Table 2 in the appendix shows that neither EPU granger causes PC, nor
PC granger causes EPU, for all reasonable lag lengths (up to eight lags). In other words, neither series contains information
which can ‘predict’ the other. We stress that neither method helps with our identification because (i) lead-lag cross-correlations
between EPU and PC are unconditional but causal claims are by nature conditional; (i) granger causality is not equivalent to
the concept of ‘cause-and-effect’ causality, as it only concerns whether one variable has forecasting power for other variables
(see Hamilton (1994)).

13
four quarters removed from the shock. A shock that occurs in quarter t is unlikely to have an immediate

impact on cash holdings, particularly if the build up in cash is due to a decrease in investment spending.

Understandably, adjusting the amount of cash held as assets can take some time, perhaps even several

quarters. Thus, by using leads of cash-to-total assets, we can better estimate the complete reaction to the

shock.13 The definitions of all variables discussed below are also summarized in Table 1.

– Insert Table 1 –

Cash-to-Total Assets is taken from Compustat Quarterly File. Compustat provides financial information

on all publicly-traded corporations in the United States by corporate observation. We follow the common

practice in the literature and use a ratio that divides cash, cash equivalents, and short-term investments by a

firm’s total assets to represent cash holdings.14 Financial firms (SIC 6000-6999) and utilities (SIC 4900-4999)

are excluded because the former hold cash related to their unique business practices while the latter hold

cash primarily for regulatory purposes. In addition, we exclude firms headquartered outside of the United

States. Summary statistics describing cash-to-total assets for the total sample as well as for the subgroups

of firms are provided in Table 2.

– Insert Table 2 Here –

The variables PC Shockt and EPU Shockt are the standardized orthogonal shocks, with a mean of zero

and a standard deviation of one, that are recovered from the SVAR model discussed in Section 3.1. These

variables proxy for unanticipated partisan conflict and economic policy uncertainty shocks, respectively. By

using these shocks, we are more confident that a given partisan conflict shock is unanticipated and thus not

explained by economic policy uncertainty or other events captured by the macroeconomic variables in the

SVAR model. Similarly, a given economic policy uncertainty shock should not be contaminated by partisan

conflict or variation in the macroeconomic variables.

Along with the recovered political and economic policy uncertainty shocks we include an indicator vari-

able, Presidential Election, that equals one during calendar quarters that occur during a U.S. presidential

election year, and zero otherwise. This variable can potentially pick up election year political uncertainty

that is not captured by the orthogonal partisan conflict shocks. However, a partisan conflict shock is intended

to capture unanticipated political uncertainty, whereas political uncertainty during election periods might

be anticipated by corporate managers.

13 This modeling choice has been used by Gulen and Ion (2015) and Duong, Nguyen, and Rhee (2017) in their analyses of

how economic policy uncertainty impacts corporate investment and cash holdings, respectively.
14 It is assumed that cash, cash equivalents, and short-term investments include non-interest earning assets, low-interest

earnings assets, and interest-bearing assets as long as they are short-term.

14
 X is a vector of firm level control variables that are common to the cash holdings literature and are

described below. Market-to-Book ratio is the market value of a firm’s equity to its book value and is a proxy

for a firm’s growth opportunities. Cash Flow measures a firm’s earnings after paying out interest, dividends,

and taxes divided by total assets minus cash. Net Working Capital-to-Assets is a firm’s current assets net of

cash, cash equivalents, short-term assets, and current liabilities to total assets less cash. Leverage measures

a firm’s long-term and current debt as a percentage of total assets less cash. R&D-to-Sales is a measure of a

firm’s research and development expenditures as a percentage of total sales. Acquisitions-to-Assets measures

a firm’s acquisitions for the current quarter as a percentage of total assets less cash. Dividend is an indicator

variable that equals one if a firm issues a dividend during the current quarter and zero otherwise. Investment

Grade is also an indicator variable that equals one if a firm has an investment grade bond or commercial

paper rating and zero otherwise. Size is the natural log of a firm’s total assets measured in 2009 dollars. CF

Volatility measures the standard deviation of industry-level cash flows over the previous five years based on

two-digit SIC codes. The value assigned to each firm is the cash flow volatility for the industry in which the

firm belongs. This follows the method suggested by Opler, Pinkowitz, Stulz, and Williamson (1999).

The vector W includes several variables meant to control for macroeconomic conditions that could

influence corporate cash holdings. GDP Growth is calculated as the log difference in quarterly real GDP,

expressed in 2009 dollars. GDP data is collected from the Federal Reserve Bank of St. Louis. Consumer

Confidence is measured using the University of Michigan Consumer Sentiment Index, also collected from the

Federal Reserve Bank of St. Louis. These two variables help to control for how corporate cash holdings are

related to current economic conditions. In addition, we include variables that measure expectations about

U.S. economic performance. Expected Economic Growth is constructed using the Philadelphia Federal

Reserve’s Livingston Survey of Professional Forecasters. Following Gulen and Ion (2015), we use the percent

change between the one-year ahead GDP forecast and the actual level of GDP observed during the survey

period as a proxy for for expected GDP growth. Finally, we calculate the log change in quarterly observations

of the Conference Board’s Leading Economic Index. Again, our choice of this variable follows Gulen and

Ion (2015). Other things equal, declining macroeconomic conditions should be associated with a build up of

corporate cash as firms engage is less investment and build up cash for precautionary reasons.

CQTRt and FQTRt , where t = 2, 3, or 4, represent vectors of calendar and fiscal quarter dummy

variables, respectively. For example, CQTR4 equals one if an observation occurs during the fourth quarter

of the calendar year and zero otherwise, and FQTR4 equals one if an observation occurs during the fourth

quarter of the fiscal year, and zero otherwise. The addition of these indicator variables controls for changes

15
to cash-to-total assets that are specific to certain quarters, i.e. “window dressing” that might occur during

the final quarter of the fiscal year or seasonal variation that might occur during the final quarter of the

calendar year.

The model includes firm level fixed-effects to control for any unobserved heterogeneity that might be

correlated with the variables in the model, indicated by the term αi . Standard errors are clustered at the

firm level. With the exception of the Dividend and Investment Grade indicator variables, all corporate

accounting variables are winsorized at the 1% level to remove potential outliers.

Summary statistics describing the uncertainty shocks and election indicator variables, corporate account-

ing variables, and macroeconomic control variables are provided in Table 3. Summary statistics describing

cash-to-total assets for all firms and based on subcategories are provided in Table 2.

– Insert Table 3 Here –

4 Primary Empirical Results

The results from our baseline regression specification are presented in Table 4. In each column we regress a

specific lead of cash-to-total assets on the full specification presented in equation 1.

– Insert Table 4 Here –

According to Table 4, a PC shock is associated with a statistically significant increase in cash-to-total

assets in the following quarter. The shock also causes a significant increase in cash-to-total assets until

four quarters ahead. Four quarters removed from a one standard deviation PC shock, cash-to-total assets

increases by 0.124 percentage points, or 0.71% of average cash-to-total assets over the entire sample period.

However, a PC shock of the size that has been observed over the last several years has a larger impact on

cash holdings. For example, a PC shock that is 2.18 standard deviations above the mean, which is the shock

estimated during the first quarter of 2010, when the Affordable Care Act was signed into law, is associated

with a 27 basis point increase in cash-to-total assets, representing 1.56% of average cash-to-total assets.

An EPU shock does not appear to have a statistically or economically significant impact on cash holdings

until four quarters following the initial shock. Since the 2008 presidential election, the largest EPU shock was

3.85 standard deviations above the mean. This shock occurred during the third quarter of 2011, the same

quarter during which the Debt Ceiling Crisis occurred. An EPU shock of this magnitude is associated with

an increase in cash-to-total assets that is 0.92% of the sample mean. The finding that the cash response is

16
larger four quarters following an EPU shock is consistent with the findings of both Gulen and Ion (2015) and

Duong, Nguyen, and Rhee (2017). Gullen and Ion found that the largest decrease in capital expenditures

occurred four quarters following an increase in the EPU Index. Duong, Nguyen, and Rhee (2017) find that

the increase in cash-to-total assets following an increase in the EPU Index is largest one year following the

rise in the EPU Index and dissipates in subsequent years.15

It is likely that a shock to partisan conflict operates through different channels. Thus, not all firms will

respond to these shocks in the same way. In the sections that follow, we explore these additional channels

to gain a better understanding of the consequences of partisan conflict.

5 Impact of PC and EPU Shocks Across Different Firm and In-

dustry Characteristics

The analysis thus far has focused on all non-financial and non-utility public corporations available in the

Compustat database. However, it is important to recognize that certain categories of firms will have different

liquidity needs, varying degrees of access to external funding, different levels of cash on hand, and different

exposures to risk. Thus, it seems prudent to examine how different types of firms respond to aggregate

political and economic policy uncertainty.

In this section, we separate firms based upon the following criteria: various measures of financial con-

straint, political sensitivity of the industry, and the degree to which investments can be considered irre-

versible.

5.1 Financially Constrained versus Financially Unconstrained Firms

Financially constrained firms are those that do not have easy access to outside capital.16 During periods of

high political uncertainty, these firms could find it especially hard to develop or maintain external financing.

Financially unconstrained firms, though, do have access to outside sources of capital. As a consequence,

these firms tend to hold a relatively lower amount of assets as cash, an observation that is confirmed by

Table 2. During a political uncertainty shock, an increase in cash-to-total assets could be evidence that firms

are holding cash for precautionary reasons. In a recent paper, Duong, Nguyen, and Rhee (2017) argue that
15 Both Gulen and Ion (2015) and Duong, Nguyen, and Rhee (2017) use the level of EPU and only control for additional

political uncertainty during presidential election years. Duong, Nguyen, and Rhee (2017) use annual, rather than quarterly
data.
16 For example, see the work by Beck and Demirguc-Kunt (2006) and Beck, Demirgüç-Kunt, and Maksimovic (2008).

17
higher economic policy uncertainty should lead financially constrained firms to hold more cash. However, it

should be pointed out that they do not directly examine the relationship between cash holdings and economic

policy uncertainty. Rather, the authors examine the relationship between corporate investment and cash

holdings, as in Gulen and Ion (2015), and assume that the relationship between investment and economic

policy uncertainty is conditioned on cash-to-total assets. Their hypothesis is that an increase in economic

policy uncertainty should moderate the decline in investment for financially constrained firms compared to

financially unconstrained firms. Conditioned on cash-to-total assets, the authors find no relationship between

economic policy uncertainty and investment for financially unconstrained firms. However, this finding could

be because the level of investment for financially unconstrained firms is not dependent upon their level of

cash holdings since, by definition, they can still obtain external financing. Thus, we argue that a more direct

test between political and economic policy uncertainty and cash holdings is warranted.

The literature uses several proxies to determine a firm’s level of financial constraint. We employ three

of the most common: total asset size, bond rating, and commercial paper rating. Gilchrist and Himmelberg

(1995) and Almeida, Campello, and Weisbach (2004) consider firms with a smaller value of total assets to be

financially constrained and firms with a larger value of total assets to be financially unconstrained. Almeida,

Campello, and Weisbach (2004) use a firm’s S&P bond rating to determine whether or not it is financially

constrained. Similarly, Calomiris, Himmelberg, and Wachtel (1995) and Almeida, Campello, and Weisbach

(2004) also use a firm’s commercial paper rating as a measure of financial constraint.

5.1.1 Financial Constraint Based on Firm Size

Small firms are defined as those in the bottom 33% of the total assets distribution while large firms are

defined as those in the top 33% of the total assets distribution. Total assets are recalculated in every

quarter, thus the firms that make up each category can vary from quarter to quarter. The results presented

in Table 5 show that both small and large firms experience an increase in cash-to-total assets in the presence

of a partisan conflict shock.17 As we observe in Table 5, the response to a PC shock is larger four quarters

removed from the shock than one quarter following the shock. On average, large firms hold approximately

8.61% of total assets as cash. The point estimate in Column 4 indicates that a one standard deviation shock

to partisan conflict is associated with an increase in cash holdings that is 1.13% of the mean. The 2010Q1

shock discuss earlier, which was 2.18 standard deviations above the mean, is associated with a little more

than a 0.21 percentage point increase in cash holdings, representing 2.47% of average cash holdings of large
17 Beginning with Table 5 we only report the point estimates for variables of interest. Full regression results are available

upon request.

18
firms.

The point estimate in Column 8 indicates that four quarters following a one standard deviation PC shock,

constrained firms will increase cash-to-total assets by approximately 0.225 percentage points. On average,

small financially constrained firms hold approximately 25.24% of total assets as cash, thus the increase in the

cash ratio is approximately 0.89% of the mean. However, the 2010Q1 shock is associated with an increase

in cash-to-total assets that is 1.95% of the average for small firms.

For Column 9 we interact the PC shock with a dummy variable that equals one if a firm is considered small

and zero if it is considered large. In this specification we use cash-to-total assets four quarters removed from

the shock. The estimated coefficient on the interaction term is positive and statistically significant, providing

further evidence that smaller firms display a larger increase in the cash ratio following a partisan conflict

shock. We view these results as evidence of a precautionary motive with respect to partisan conflict. When

corporate managers are uncertain about the types of policies governments will enact, they will hold more

cash as a potential buffer. Since small firms are likely to be more financially constrained, they will exhibit

greater sensitivity to these uncertainties. The fact that the increase in cash-to-total assets for unconstrained

firms is a larger proportion of the average cash ratio is likely due to how little cash these firms hold to begin

with.

– Insert Table 5 Here –

Interestingly, small and large firms appear to behave differently from one another when confronted with an

economic policy uncertainty shock. Other things equal, an economic policy uncertainty shock is associated

with a decrease in cash-to-total assets for small firms, becoming statistically insignificant four quarters

removed from the shock. Conversely, large firms see a positive and statistically significant increase in cash-

to-total assets following an economic policy uncertainty shock, which, as we’ve come to expect, is larger four

quarters after the shock. In the case of large firms, a one standard deviation EPU shock is associated with

a 0.123 percentage point increase in the cash ratio, or 1.43% of the mean. Even four quarters removed from

the EPU shock, when the cash response for constrained firms is no longer statistically significant, Column 9

shows that the response of smaller firms is 0.27 percentage points smaller than the response of large firms.

The finding that both small and large firms increase cash-to-total assets following a PC shock while

only large firms do so following an EPU shock warrants further discussion. We propose three plausible

reasons for this observation. The first relates to the different types of uncertainties generated by each type

of shock. As noted in Azzimonti (2018), a PC shock only generates uncertainty about “which policies would

19
be chosen..., or more specifically, whether preventative policies will be implemented at all (ibid : p. 10).”

Conversely, an EPU shock is related to uncertainty about the effects of policies already decided on by the

government.18 Thus, following a PC shock, we would expect all firms, regardless of financial constraint, to

increase cash-to-total assets for precautionary reasons.

Not only is an EPU shock related to uncertainty about the impact of a policy, but this uncertainty can

be triggered by events such as global financial crises and other international crises. The extent to which

large and small firms are affected by international crises could be related to how much of their business is

done overseas. Comparing foreign earnings as a percentage of pre-tax income, half of the small firms earn at

most 0% of pre-tax income from foreign sales. Conversely, half of unconstrained firms derive at least 24%

of pre-tax income from foreign sales.19 This gives us one reason to expect an EPU shock to have a more

meaningful impact on large firms as opposed to small firms.

Lastly, recall that by definition, small financially constrained firms have less access to external financing

sources. Conversely, large firms rely on external sources of funding and hold less than 9% of total assets as

cash. Ceteris paribus, a large firm might be more sensitive to an EPU shock and, as a result, hoard cash.

Moreover, small firms devote a much larger proportion of sales revenue to R&D expenses. Specifically, on

average the small firms in our sample spend approximately 47% of sales revenue on R&D while large firms

spend only 3%. The need to continue financing R&D could lead small firms to reduce cash-to-total assets as

they continue with research and development.20

5.1.2 Financial Constraint Based on Bond and Commercial Paper Rating

A firm can also considered financially constrained if it has never received a rating from S&P and issues a

positive level of debt. Firms that issue debt and have a rating are considered financially unconstrained.21

A similar measure of financial constraint is based on commercial paper rating. An unrated firm that has a

positive amount of debt is considered financially constrained while a rated firm that has a positive amount of

debt is considered financially unconstrained.22 According to Table 2, constrained firms based on bond and

commercial paper rating hold 15.25% and 13.47% of total assets as cash, respectively, whereas unconstrained
18 As noted in Section 1, a similar distinction is made in Pastor and Veronesi (2012).
19 In the Compustat database, foreign earnings are reported on a pre-tax basis, making a comparison with overall pre-tax
income appropriate.
20 In a study of how firms’ R&D expenditures react to election periods of U.S. governors, Atanassov, Julio, and Leng (2016)

find evidence that R&D expenditures increase around election periods, which they interpret as a response to uncertainty. An
increase in R&D expenditures would correspond to a decrease in cash-to-total assets.
21 Almeida, Campello, and Weisbach (2004) categorize firms with no leverage, and thus no bond rating, as unconstrained.

Upon further analysis, these firms hold significantly more cash than other financially unconstrained firms. Thus, we drop firms
without leverage or a bond rating from the data set.
22 Again, firms with no debt and no rating are excluded.

20
firms based on bond rating and commercial paper rating hold 9.04% and 6.87% of total assets as cash,

respectively. These cash-to-total assets ratios are much lower than we observed for small and large firms,

but we still observe constrained firms holding a larger proportion of assets as cash compared to unconstrained

firms.

– Insert Table 6 Here –

Qualitatively, the results remain similar to those for small and large firms that were discussed in Sec-

tion 5.1.1. Table 6 reports results based on bond rating and shows that both constrained and unconstrained

firms are associated with an increase in cash-to-total assets that is largest four quarters removed from the

PC shock. The point estimate on PC shock in Column 8 is slightly larger than the point estimate in Col-

umn 4, indicating that on average, constrained firms experience a larger increase in the cash ratio than

unconstrained firms do. Four quarters following a one standard deviation PC shock, financially constrained

firms experience an increase in cash-to-total assets that is 0.84% of the average while unconstrained firms

experience an increase in cash holdings that is approximately 1.37% of the average. However, the point

estimate on the interaction between PC Shock and the financial constraint indicator, displayed in Column

9, while positive, is not statistically significant.23 As we observed in Table 5, unconstrained firms are associ-

ated with an increase in cash-to-total assets following an EPU shock while constrained firms are associated

with decreases in cash-to-total assets one to three quarters removed from an EPU shock and no statistically

significant change in cash-to-total assets four quarters removed from the shock.

– Insert Table 7 Here –

Table 7 simply reveals that the behavior of constrained and unconstrained firms does not change much

when financial constraint is determined by commercial paper rating. Overall, constrained and unconstrained

firms increase cash-to-total assets in the presence of a partisan conflict shock while only unconstrained firms

increase cash-to-total assets in the presence of an economic policy uncertainty shock.24

To summarize the findings of this section, we find that financially constrained and unconstrained firms

are associated with an increase in cash-to-total assets in the presence of a partisan conflict shock. Cash-

to-total assets increases one quarter following a PC shock and is largest four quarters following the shock.

When constraint is determined by size we show a statistically larger increase in the cash ratio for small
23 The indicator variables for financial constraint based on bond and commercial paper rating, respectively, are collinear with

firm fixed-effects and are not directly included in the interaction models presented in Column 9 of Tables 6 and 7.
24 One minor difference between Tables 6 and 7 is that constrained firms based on Commercial Paper Rating display a smaller

increase in cash ratio compared to unconstrained firms in the face of PC shocks. But such difference is insignificant.

21
firms compared to large firms. Interestingly, unconstrained firms are associated with an increase in cash-to-

total assets one to four quarters following an EPU shock. Financially constrained firms, though, initially

experience decreases in cash-to-total assets that are not statistically different from zero four quarters removed

from the EPU shock. However, plausible explanations for this finding lie with the fundamental difference

between a PC shock and an EPU shock and differences between how the potential sources of an EPU shock

impact financially constrained and unconstrained firms.

5.2 Political Sensitivity of Firms

Herron, Lavin, Cram, and Silver (1999) provide evidence that fifteen “economic sectors” can be classified as

politically sensitive (ibid : p. 51). Using industry classifications from Fama and French (1997), Atanassov,

Julio, and Leng (2016) group these sectors into seven “politically sensitive” industries: defense, health

care services, petroleum and natural gas, pharmaceuticals, telecommunications, tobacco, and transportation

(ibid : p.25).

In this section we examine how the cash holdings of firms in these industries react to a partisan conflict

shock. The direction of this reaction is not immediately clear. On the one hand, firms in politically sensitive

industries might hold more cash compared to relatively insensitive industries if heightened political conflict

has a more adverse impact on their cash flows. On the other hand, as Atanassov, Julio, and Leng (2016) point

out, if research and development makes up a large proportion of investment spending in these industries, then

political uncertainty might lead to more investment spending. The reason is that delaying these investments

also delays the cash flow that will be received from a project. In this case, a firm might want to proceed

with the investment. Finally, as noted by Hassan, Hollander, Tahoun, and Lent (2016), it is possible that

firms might increase lobbying expenditures when risks associated with partisan conflict are expected to be

higher.

– Insert Table 8 Here–

Columns 4 and 8 from Table 8 show that firms in both politically sensitive and insensitive industries

experiences higher cash ratios following a PC shock. On average, firms in politically sensitive industries

experience a 0.15 percentage point increase in cash-to-total assets four quarters following a one standard

deviation PC shock, representing 0.67% of the average cash ratio for these firms. Firms in the remaining

industries experience a 0.11 percentage point increase in cash-to-total assets, which is approximately 0.69%

of the average cash ratio. Overall, there does not appear to be much difference between the reactions of

22
firms in politically sensitive industries compared to those in the remaining industries.

When politically sensitive industries are analyzed separately from the remaining industries, we do not

observe a statistically significant relationship between cash-to-total assets and an EPU shock. However,

in Column 9, when the EPU shock is interacted with the indicator for politically sensitive industries, two

observations are in order: first, for firms in the non-sensitive industries, there is a small increase in cash-

to-total assets following a one standard deviation EPU shock; second, the difference between the cash ratio

for these firms and the firms in politically sensitive industries is not statistically significant.25 This smaller

impact is not surprising since the construction of the PC and EPU shocks, discussed in Section 3.1, removes

changes to the EPU series caused by partisan conflict.

5.3 Capital Intensity and Asset Redeployability

Gulen and Ion (2015) find that the degree to which a firm’s investments are irreversible can lead to less

investment following an increase in economic policy uncertainty. As proxies for irreversibility, they use the

ratio of a firm’s net expenditures on plant, property, and equipment divided to total assets, referred to as

capital intensity, and a measure of how salable assets are across industries, referred to as asset redeployability.

While Gulen and Ion (2015) find that firms with a higher capital intensity ratio and fewer redeployable assets

are more likely to reduce investment spending when economic policy uncertainty increases, Duong, Nguyen,

and Rhee (2017) find no evidence of a corresponding increase in cash-to-total assets one year removed from

an increase in economic policy uncertainty.

– Insert Table 9 Here –

Table 9 shows no evidence that firms with greater capital intensity increase cash-to-total assets by an

amount larger than firms with an average level of capital intensity.26 Similarly, the increase in cash-to-total

assets following a PC shock for firms with relatively fewer redeployable assets is no different from a firm with

an average level of these assets.27

The results from Sections 5.2 and 5.3 show no evidence that managers of firms in politically sensitive

industries, firms with greater exposure to capital intensive production, and firms with unique assets adopt

cash management strategies that are different from the average firm. With respect to politically sensitive
25 The politically sensitive indicator variable is collinear with the firm fixed-effects and is not included directly in the regression

specification.
26 The average marginal effect of a PC shock is positive for all levels of capital intensity, however, these point estimates are

not statistically different from one another.

27 As with capital intensity, the increase in the cash ratio is positive and significantly different from zero for all levels of

redeployability, but these point estimates are not statistically different from one another.

23
industries, some of the increase in cash could be offset by concerns over R&D payoffs and lobbying. When

viewed with all of the results presented in Section 5, the evidence points towards financial constraint, and

the size of the firm in particular, as the most important factor in a firm’s response to a partisan conflict

shock.

6 Robustness Checks

In this section we will discuss a series of robustness checks that largely confirm the results presented in the

previous section.

6.1 Cash Holdings and Partisan Conflict: Accounting for the Post-2008 Period

Since 2008, the United States has dealt with the after effects of the Great Recession as well as a political

environment defined by intense partisanship. It is certainly possible that the PC and EPU shocks felt during

this period could be exerting undue influence on the estimated correlation between the PC and EPU shocks

and cash holdings. We account for this potential ‘structural change’ in the economy by including a dummy

variable in the SVAR system that equals one for observations occurring after 2008Q4.

– Insert Figure 2 Here –

The results presented in Table 10 show that an unanticipated PC Shock still results in an increase in

cash-to-total assets, with the largest increase in the cash ratio occurring four quarters after the shock. The

largest standardized PC shock displayed in Figure 2 occurs during 1995Q4, when the federal government shut

down twice. Using the point estimate in Column 4, this shock is associated with a 24 basis point increase

in cash-to-total assets, representing 1.38% of average cash-to-total assets. Thus, in addition to upholding

the primary results, this section reveals that the impact of a PC Shock is smaller when we account for the

post-2008 period.

An EPU Shock is no longer associated with an increase in cash-to-total assets. In stark contrast to

Table 4, we now observe a slight decrease in cash-to-total assets one – three quarters following a an EPU

Shock and a positive but statistically insignificant relationship four quarters removed from a shock. Thus,

when considering all firms, any evidence of a positive relationship between an EPU Shock and cash-to-total

assets is driven by the post-2008 period.

– Insert Table 10 Here –

24
6.2 Cash-to-Net Assets

An alternative measure of corporate cash holdings is cash and marketable securities divided by total assets

minus cash and marketable securities, often referred to as net assets. Opler, Pinkowitz, Stulz, and Williamson

(1999) used cash-to-net assets because they wanted to know how a firm’s cash holdings compared to its assets

in place. We reestimate all of the regressions from Section 4, replacing cash-to-total assets with the natural

logarithm of cash-to-net assets. In order to conserve space, the regression results are provided Tables 3 –

10 in the appendix.28 The results remain qualitatively similar in all but a couple of cases. For example,

when financial constraint is determined by commercial paper rating, constrained firms appear to hold less

cash-to-net assets as compared to unconstrained firm. We also find a result indicating that capital intensive

firms hold less cash-to-net assets compared to firms with an average level of capital intensity.

6.3 Alternative Structural VAR models

We provide evidence that our results are qualitatively robust to different specifications of our structural

VAR models. First, we consider a factor-augmented structural VAR. We extract six common factors from

a large dataset and add the factor that explains the largest share of the variance of our series to the VAR

model, where the factor is ordered first, PC is ordered second and EPU is ordered third. A factor-augmented

VAR model allows us to summarize the overall economic conditions through principal component analysis,

a methodology which can potentially mitigate the problem of omission of variables in our baseline structural

VAR. These results are available in Table 13 in the appendix. The impact of the PC shock on cash-to-total

assets remains similar. However, the impact of the EPU shock on cash-to-total assets is negative up to three

quarters removed from the shock and statistically and economically insignificant four quarters removed from

the shock. Second, we reestimate the baseline structural VAR model in Section 3.1 with alternative orderings

of variables. In particular, we consider the following two models: (i) EPU ordered as the first variable, and

(ii) EPU ordered as the last variable. Results are reported in Tables 14 – 15 in the appendix respectively,

which show that our baseline results remain robust. Second, we reestimate our baseline structural VAR

model using 2 lags instead of 4 lags while we keep the same baseline variable ordering. Tables 16 – 22 report

the corresponding results. It worths noting that all our conclusions hold.
28 We use the natural logarithm of this ratio because dividing by net assets introduces many outliers, as other authors using

this measure of cash holdings have experienced.

25
7 Conclusion

As the U.S. political environment has become more contentious and polarized, many scholars across the

economics and finance disciplines have begun to investigate how an uncertain political environment impacts

economic decision making. In this paper, we contribute to this growing literature by analyzing how an

unanticipated U.S. partisan conflict shock impacts corporate cash holdings. Using all firms in the Compustat

Quarterly File from 1985Q1 – 2014Q4, the Philadelphia Federal Reserve Bank’s U.S. Partisan Conflict Index,

and the Economic Policy Uncertainty Index from Baker, Bloom, and Davis (2016), we find that a partisan

conflict shock is associated with a positive increase in cash-to-total assets. An innovation of our paper is

that we use a structural vector autoregression model to isolate partisan conflict shocks that are orthogonal

to economic policy uncertainty shocks, a related but separate type of aggregate uncertainty.

In addition to analyzing all firms, we look at several subsamples of firms and find that not all firms

respond to partisan conflict shocks in the same way. The strongest evidence shows that financially constrained

firms, and small firms in particular, are associated with larger increases in cash-to-total assets compared to

unconstrained firms. We find no evidence that firms in politically sensitive industries increase cash-to-total

assets above those in relatively insensitive industries. Finally, we do not find evidence of a larger increase

in cash-to-total assets for more capital intensive firms or firms that use fewer redeployable assets, similar to

recent findings by Duong, Nguyen, and Rhee (2017). In contrast, we find that the responses of cash-to-total

assets following an EPU shock are rather inconsistent four quarters out, and that an EPU shock is only

associated with an increase in cash-to-total assets for financially constrained firms.

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 Table 1: Variable Definitions

Variable Definition
Cash Holdings Cash, cash equivalents, and short-term investments divided by a firm’s total assets
PC Shock4,1 Standardized structural Partisan Conflict shock recovered from the four lag SVAR model with the PC Index ordered first
EPU Shock4,2 Standardized structural Economic Policy Uncertainty shock recovered from the four lag SVAR model with the EPU Index ordered second
PC Shockd4,1 Same construction as PC Shock4,1 using a Post-2008 dummy
EPU Shockd4,2 Same constructing as EPU Shock4,2 using a Post-2008 dummy
Presidential Election Equals one for calendar quarters occurring during a presidential election year and zero otherwise
Market-to-Book Market value of a firm’s equity to its book value
Cash Flow Earnings after paying out interest, dividends, and taxes divided by total assets minus cash
Net Working Capital-to-Assets Current assets net of cash, cash equivalents, short-term assets, and current liabilities to total assets less cash
30

Leverage Long-term and current debt as a percentage of total assets less cash
R&D-to-Sales Research and development expenditures as a percentage of total sales
Acquisitions-to-Assets Acquisitions for the current quarter as a percentage of total assets minus cash
Dividend Equals one if a firm issues a dividend during the current quarter and zero otherwise
Investment Grade Equals one if a firm has an investment grade bond or commercial paper rating and zero otherwise
Size The natural log of a firm’s total assets measured in 2009 dollars
CF Volatility The standard deviation of industry-level cash flows over the previous five years based on two-digit SIC codes
GDP Growth Log difference in quarterly GDP measured in 2009 dollars
Consumer Confidence Quarterly observations of the University of Michigan Consumer Sentiment Index
Expected GDP Growth Percent change between the one-year ahead GDP forecast and the actual level of GDP observed during the Livingston survey period
Leading Economic Index Log change in quarterly observations of the Conference Board’s Leading Economic Index
Variable sources are discussed in Section 3.
 Table 2: Summary Statistics: Cash Holdings by Subgroup

Category Mean SD Min Max

All Firms 0.1740 0.2364 0.00 1.00
Constrained Firms (Size) 0.2524 0.2917 0.00 1.00
Unconstrained Firms (Size) 0.0861 0.1194 0.00 1.00
Constrained Firms (Bond Rating) 0.1525 0.2112 0.00 1.00
Unconstrained Firms (Bond Rating) 0.0904 0.1308 0.00 1.00
Constrained Firms (Commercial Paper Rating) 0.1347 0.1934 0.00 1.00
Unconstrained Firms (Commercial Paper Rating) 0.0687 0.0926 0.00 1.00
Politically Sensitive Industries 0.2254 0.2891 0.00 1.00
Cash holdings is defined in Table 1. The subgroups of firms are defined in Section 5.

31
 Table 3: Summary Statistics

Mean SD Min Max

Uncertainty Shocks and Election Date Variables
PC Shock4,1 0.0000 1.0000 =2.5779 2.1835
EPU Shock4,2 0.0000 1.0000 =2.4382 3.8491
PC Shockd4,1 0.0000 1.0000 =2.4147 2.3818
EPU Shockd4,2 0.0000 1.0000 =2.1947 3.7062
Presidential Election 0.2379 0.4258 0.0000 1.0000
Corporate Control Variables
Market-to-Book 3.9136 11.9743 0.2503 101.2099
Cash Flow =0.0689 0.3608 =2.8292 0.1235
Net Working Capital-to-Assets =0.2082 1.5872 =13.0000 0.5723
Capital Expend.-to-Assets 0.0199 0.0306 =0.0067 0.1873
Leverage 0.3851 0.7006 0.0000 5.6064
R&D-to-Sales 0.2323 1.1882 0.0000 9.8116
Acquisitions-to-Assets 0.0047 0.0219 =0.0020 0.1606
Dividend 0.1910 0.3931 0.0000 1.0000
Investment Grade 0.0848 0.2786 0.0000 1.0000
Size 4.6710 2.6265 =2.8473 10.4356
CF Volatility 0.7977 3.5874 0.0027 167.9218
Macroeconomic Control Variables
GDP Growth 0.0066 0.0060 =0.0214 0.0187
Consumer Confidence 87.9767 11.8322 57.7000 110.1000
Expected GDP Growth 5.6815 2.2035 =0.5256 12.7640
Leading Economic Index 0.0044 0.0171 =0.0832 0.0310
See Table 1 for variable definitions.

32
 Table 4: Cash Holdings and Partisan Conflict: Baseline Results

(1) (2) (3) (4)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4
PC Shock4,1 0.000846∗∗∗ 0.00110∗∗∗ 0.000885∗∗∗ 0.00124∗∗∗
(0.000171) (0.000171) (0.000171) (0.000173)

EPU Shock4,2 =0.000321 =0.0000700 =0.000168 0.000417∗∗

(0.000200) (0.000199) (0.000204) (0.000205)

Presidential Election 0.000612 =0.000501 =0.000574 0.000879∗

(0.000511) (0.000513) (0.000527) (0.000530)

Market-to-Book 0.00182∗∗∗ 0.00177∗∗∗ 0.00163∗∗∗ 0.00116∗∗∗

(0.000178) (0.000182) (0.000186) (0.000197)

Cash Flow 0.0222∗∗∗ 0.0163∗∗∗ 0.0125∗∗ 0.00887

(0.00577) (0.00568) (0.00577) (0.00603)

Net Working Capital-to-Assets =0.0177∗∗∗ =0.0159∗∗∗ =0.0151∗∗∗ =0.0156∗∗∗

(0.00179) (0.00183) (0.00191) (0.00190)

Capital Expend.-to-Assets 0.366∗∗∗ 0.220∗∗∗ 0.125∗∗∗ 0.0497∗∗∗

(0.0188) (0.0183) (0.0179) (0.0177)

Leverage =0.0602∗∗∗ =0.0540∗∗∗ =0.0479∗∗∗ =0.0441∗∗∗

(0.00331) (0.00338) (0.00352) (0.00363)
∗∗∗ ∗∗∗ ∗∗∗
R&D-to-Sales 0.0123 0.0110 0.0100 0.00870∗∗∗
(0.00121) (0.00119) (0.00120) (0.00119)

Acquisitions-to-Assets =0.141∗∗∗ =0.140∗∗∗ =0.133∗∗∗ =0.137∗∗∗

(0.00912) (0.00875) (0.00865) (0.00877)
∗∗ ∗
Dividend 0.00466 0.00345 0.00252 0.000941
(0.00201) (0.00200) (0.00199) (0.00200)

Investment Grade =0.0102∗∗∗ =0.00851∗∗∗ =0.00759∗∗ =0.00692∗∗

(0.00307) (0.00307) (0.00307) (0.00309)

Size =0.0117 ∗∗∗

=0.0138 ∗∗∗
=0.0146∗∗∗
=0.0150∗∗∗
(0.00130) (0.00130) (0.00131) (0.00132)

CF Volatility 0.000120 0.0000822 0.0000976 0.0000756

(0.000154) (0.000145) (0.000146) (0.000143)

GDP Growth 0.00950 0.0309 =0.0501 =0.203∗∗∗

(0.0385) (0.0381) (0.0383) (0.0383)

Consumer Confidence =0.000374 ∗∗∗

=0.000388 ∗∗∗
=0.000388 ∗∗∗
=0.000360∗∗∗
(0.0000541) (0.0000544) (0.0000548) (0.0000552)

Expected GDP Growth =0.00179 ∗∗∗

=0.00231 ∗∗∗
=0.00253 ∗∗∗
=0.00278∗∗∗
(0.000335) (0.000337) (0.000341) (0.000349)

Leading Economic Index 0.341∗∗∗ 0.297∗∗∗ 0.238∗∗∗ 0.219∗∗∗

(0.0249) (0.0251) (0.0254) (0.0257)

Constant 0.261∗∗∗ 0.275∗∗∗ 0.287∗∗∗ 0.285∗∗∗

(0.00835) (0.00841) (0.00851) (0.00866)
Observations 387359 370666 355718 341909
Adjusted R2 0.730 0.736 0.741 0.743
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent
variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and fiscal and
calendar-quarter dummy variables. PC Shock4,1 and EPU Shock4,2 refer to the standardized structural Partisan Conflict and
Economic Policy Uncertainty shocks, respectively, recovered from the four lag SVAR model with the PC Index ordered first and
the EPU Index ordered second. All variables are defined in Table 1.

33
 Table 5: Cash Holdings and Partisan Conflict: Constrained and Unconstrained Firms Based on Size

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
Unconstrained Constrained
PC Shock4,1 0.000853∗∗∗ 0.000981∗∗∗ 0.000894∗∗∗ 0.000977∗∗∗ 0.00153∗∗∗ 0.00188∗∗∗ 0.00146∗∗∗ 0.00225∗∗∗ 0.000852∗∗∗
(0.000161) (0.000159) (0.000162) (0.000163) (0.000513) (0.000509) (0.000523) (0.000533) (0.000170)

EPU Shock4,2 0.00100∗∗∗ 0.00116∗∗∗ 0.000972∗∗∗ 0.00123∗∗∗ =0.00165∗∗∗ =0.00140∗∗ =0.00216∗∗∗ =0.000509 0.00161∗∗∗
(0.000208) (0.000207) (0.000209) (0.000213) (0.000568) (0.000566) (0.000604) (0.000615) (0.000233)

PC Shock4,1 × Constrained 0.00168∗∗∗

(0.000521)

EPU Shock4,2 × Constrained =0.00270∗∗∗

(0.000573)

Constrained 0.0338
(0.0251)

Presidential Election = 0.000565 = 0.000289 0.000790 0.00201∗∗∗ 0.00238 =0.00135 =0.00377∗∗ =0.00288∗ 0.000152
(0.000458) (0.000467) (0.000485) (0.000495) (0.00152) (0.00158) (0.00165) (0.00169) (0.000731)
Observations 127379 123848 120773 117894 98054 92151 86792 81954 199848
Adjusted R2 0.736 0.737 0.737 0.739 0.628 0.638 0.645 0.650 0.706
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and
fiscal and calendar-quarter dummy variables. PC Shock4,1 and EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag SVAR model with the PC Index ordered first and the EPU Index
ordered second. Constrained firms are defined as those in the bottom 33% of the total assets distribution. Unconstrained firms are defined as those in the top 33% of the total assets distribution. All variables are defined in Table 1.
34
 Table 6: Cash Holdings and Partisan Conflict: Financial Constraint Based on Bond Rating

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
Unconstrained Constrained
PC Shock4,1 0.000935∗∗∗ 0.00111∗∗∗ 0.00106∗∗∗ 0.00124∗∗∗ 0.000771∗∗∗ 0.00109∗∗∗ 0.000865∗∗∗ 0.00128∗∗∗ 0.00110∗∗∗
(0.000189) (0.000192) (0.000196) (0.000200) (0.000243) (0.000246) (0.000245) (0.000247) (0.000196)

EPU Shock4,2 0.00106∗∗∗ 0.00117∗∗∗ 0.000983∗∗∗ 0.00137∗∗∗ =0.000963∗∗∗ =0.000738∗∗∗ =0.000815∗∗∗ =0.0000253 0.00145∗∗∗
(0.000228) (0.000235) (0.000232) (0.000234) (0.000265) (0.000267) (0.000285) (0.000284) (0.000225)

PC Shock4,1 × Constrained 0.000273

(0.000301)

EPU Shock4,2 × Constrained =0.00155∗∗∗

(0.000324)

Presidential Election 0.0000956 0.0000390 0.000751 0.00196∗∗∗ 0.00109 =0.000651 =0.00103 0.000273 0.000992∗∗
(0.000542) (0.000546) (0.000561) (0.000556) (0.000708) (0.000714) (0.000745) (0.000756) (0.000499)
Observations 132202 128515 125274 122203 211296 200512 190847 181994 304197
Adjusted R2 0.662 0.664 0.666 0.667 0.709 0.716 0.720 0.721 0.718
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and
fiscal and calendar-quarter dummy variables. PC Shock4,1 and EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag SVAR model with the PC Index ordered first and the EPU Index
ordered second. Constrained firms are defined as those that have never received an S&P rating and have a positive level of debt. Unconstrained firms are defined as those that have an S&P rating and issue a positive level of debt. The
variable Constrained is collinear with the firm fixed-effects and is not included directly into the regression equation. All variables are defined in Table 1.
35
 Table 7: Cash Holdings and Partisan Conflict: Financial Constraint Based on Commercial Paper Rating

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
Unconstrained Constrained
PC Shock4,1 0.00115∗∗∗ 0.00111∗∗∗ 0.00146∗∗∗ 0.00144∗∗∗ 0.000777∗∗∗ 0.00110∗∗∗ 0.000876∗∗∗ 0.00124∗∗∗ 0.00146∗∗∗
(0.000248) (0.000233) (0.000236) (0.000249) (0.000183) (0.000184) (0.000184) (0.000186) (0.000255)

EPU Shock4,2 0.00159∗∗∗ 0.00184∗∗∗ 0.00130∗∗∗ 0.00176∗∗∗ =0.000447∗∗ =0.000277 =0.000330 0.000326 0.00151∗∗∗
(0.000315) (0.000317) (0.000295) (0.000323) (0.000203) (0.000205) (0.000215) (0.000214) (0.000284)

PC Shock4,1 × Constrained =0.000196

(0.000309)

EPU Shock4,2 × Constrained =0.00114∗∗∗

(0.000326)

Presidential Election =0.000121 =0.0000311 0.000706 0.00169∗∗ 0.000655 =0.000528 =0.000567 0.000777 0.000966∗
(0.000668) (0.000706) (0.000767) (0.000798) (0.000532) (0.000534) (0.000555) (0.000559) (0.000500)
Observations 37578 36884 36272 35696 302598 288974 276817 265594 301290
Adjusted R2 0.660 0.659 0.658 0.660 0.706 0.712 0.716 0.717 0.718
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects
and fiscal and calendar-quarter dummy variables. PC Shock4,1 and EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag SVAR model with the PC Index ordered first and the
EPU Index ordered second. Constrained firms are defined as those that have never received an S&P rating and have a positive level of debt. Unconstrained firms are defined as those that have an S&P rating and issue a positive level
of debt. The variable Constrained is collinear with the firm fixed-effects and is not included directly into the regression equation. All variables are defined in Table 1.
36
 Table 8: Cash Holdings and Partisan Conflict: Political Sensitivity of Firms

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
Insensitive Sensitive
PC Shock4,1 0.000812∗∗∗ 0.00103∗∗∗ 0.000894∗∗∗ 0.00110∗∗∗ 0.000775∗∗ 0.00115∗∗∗ 0.000714∗ 0.00151∗∗∗ 0.00120∗∗∗
(0.000190) (0.000187) (0.000186) (0.000190) (0.000381) (0.000390) (0.000397) (0.000390) (0.000188)

EPU Shock4,2 =0.000173 =0.0000683 =0.000122 0.000384∗ =0.000696 0.0000274 =0.000216 0.000600 0.000592∗∗∗
(0.000222) (0.000219) (0.000227) (0.000227) (0.000466) (0.000468) (0.000473) (0.000480) (0.000222)

PC Shock4,1 × Politically Sensitive 0.000162

(0.000413)

EPU Shock4,2 × Politically Sensitive =0.000755∗

(0.000445)

Presidential Election 0.000320 =0.000515 =0.000469 0.00117∗∗ 0.000913 =0.00118 =0.00154 =0.000651 0.000881∗
(0.000558) (0.000560) (0.000575) (0.000578) (0.00122) (0.00123) (0.00127) (0.00129) (0.000530)
Observations 298467 285176 273312 262375 88892 85490 82406 79534 341909
Adjusted R2 0.692 0.698 0.701 0.703 0.792 0.797 0.802 0.805 0.743
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and fiscal
and calendar-quarter dummy variables. PC Shock4,1 and EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag SVAR model with the PC Index ordered first and the EPU Index ordered
second. Political sensitivity is determined according to SIC codes proposed by Atanassov, Julio, and Leng (2016). All variables are defined in Table 1.
37
Table 9: Cash Holdings and Partisan Conflict: Capital Intensity
and Redeployability

(1) (2)
Cash Holdingst+4 Cash Holdingst+4
PC Shock4,1 0.00116∗∗∗ 0.00110∗∗∗
(0.000304) (0.000309)

PC Shock4,1 × Capital Intensity 0.000187

(0.000646)
PC Shock4,1 × Redeployability 0.000137
(0.000147)

EPU Shock4,2 0.000632∗ 0.000491

(0.000342) (0.000363)

EPU Shock4,2 × Capital Intensity =0.000617

(0.000690)

EPU Shock4,2 × Redeployability 0.0000208

(0.000175)

Presidential Election 0.000901∗ 0.00100∗

(0.000529) (0.000552)
Observations 341711 308393
Adjusted R2 0.743 0.749
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are
clustered at the firm level. The dependent variable in all regressions is the ratio
of cash holdings to total assets. All regressions include firm fixed-effects and
fiscal and calendar-quarter dummy variables. PC Shock4,1 and EPU Shock4,2
refer to the standardized structural PC and EPU shocks, respectively, recovered
from the 4 lag SVAR model with the PC Index ordered first and the EPU Index
ordered second. See text for definitions of capital intensity and investment
redeployability. All variables are defined in Table 1.

38
 Table 10: Cash Holdings and Partisan Conflict: Controlling for the Post-2008 Period

(1) (2) (3) (4)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4
PC Shockd
4,1 0.000472∗∗∗ 0.000775∗∗∗ 0.000647∗∗∗ 0.00101∗∗∗
(0.000165) (0.000166) (0.000165) (0.000166)

EPU Shockd
4,2 =0.000732∗∗∗ =0.000398∗∗ =0.000420∗∗ 0.000262
(0.000192) (0.000190) (0.000196) (0.000198)

Presidential Election 0.000663 =0.000528 =0.000588 0.000744

(0.000511) (0.000513) (0.000528) (0.000530)
Observations 387359 370666 355718 341909
Adjusted R2 0.730 0.736 0.741 0.743
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The
dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-
effects and fiscal and calendar-quarter dummy variables. PC Shockd d
4,1 and EPU Shock4,2 refer to the standardized
structural Partisan Conflict and Economic Policy Uncertainty shocks, respectively, recovered from the four lag SVAR
model with the PC Index ordered first, the EPU Index ordered second, and a dummy variable that equals 1 for all
observations occurring after 2008Q4. All variables are defined in Table 1.

39
 Figure 1: PC and EPU Shocks from 4-Lag SVAR Model for 1986Q1 – 2014Q4

−2
1986−01−01

1988−01−01

1990−01−01

1992−01−01

1994−01−01

1996−01−01

1998−01−01

2000−01−01

2002−01−01

2004−01−01

2006−01−01

2008−01−01

2010−01−01

2012−01−01

2014−01−01

2016−01−01
PC Shock EPU Shock

Note: PC and EPU shocks are recovered from a 4-lag SVAR model with the PC Index ordered first and the EPU
Index ordered second. The shocks are standardized to have a mean of zero and a standard deviation of one. The
y-axis measures standard deviations.

40
Appendix: Corporate Decision-Making in the Presence of Political
Uncertainty: The Case of Corporate Cash Holdings

1
 Table 1: Summary Statistics: LN(Cash-To-Net Assets) by Subgroup

Category Mean SD Min Max

All Firms −2.5436 2.1491 −15.1540 10.8206
Constrained Firms (Size) −1.9224 2.3258 −10.4699 9.1808
Unconstrained Firms (Size) −3.2222 1.6661 −15.1540 7.6522
Constrained Firms (Bond Rating) −2.6893 2.0714 −13.6967 9.3442
Unconstrained Firms (Bond Rating) −3.1973 1.7199 −15.1540 8.6373
Constrained Firms (Commercial Paper Rating) −2.8375 1.9915 −14.4003 9.3442
Unconstrained Firms (Commercial Paper Rating) −3.3856 1.5544 −15.1540 4.5145
Politically Sensitive Industries −2.2227 2.4637 −15.1540 8.0437
Cash holdings is defined in Table 1 of the main text. The subgroups of firms are defined in Section
5.

2
 Table 2: Cash Holdings and Partisan Conflict: Results using Cash-to-Net Assets

(1) (2) (3) (4)

LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4
PC Shock4,1 0.0136∗∗∗ 0.0156∗∗∗ 0.0128∗∗∗ 0.0167∗∗∗
(0.00190) (0.00193) (0.00195) (0.00198)

EPU Shock4,2 0.00442∗∗ 0.00997∗∗∗ 0.00977∗∗∗ 0.0138∗∗∗

(0.00216) (0.00217) (0.00222) (0.00229)

Presidential Election 0.00678 0.00130 0.00201 0.0184∗∗∗

(0.00535) (0.00542) (0.00556) (0.00556)
Observations 381548 365141 350499 336866
Adjusted R2 0.671 0.675 0.679 0.681
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all
regressions is the natural log of the cash-to-net assets ratio. All regressions include firm fixed-effects and fiscal and calendar-quarter dummy
variables. PC Shock4,1 and EPU Shock4,2 refer to the standardized structural Partisan Conflict and Economic Policy Uncertainty shocks,
respectively, recovered from the four lag VAR model with the PC Index ordered first and the EPU Index ordered second.

3
 Table 3: Net Cash Holdings and Partisan Conflict: Constrained and Unconstrained Firms Based on Size

(1) (2) (3) (4) (5) (6) (7) (8) (9)

LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+4
Unconstrained Constrained
PC Shock4,1 0.0189∗∗∗ 0.0181∗∗∗ 0.0176∗∗∗ 0.0175∗∗∗ 0.0167∗∗∗ 0.0216∗∗∗ 0.0158∗∗∗ 0.0206∗∗∗ 0.0150∗∗∗
(0.00272) (0.00271) (0.00272) (0.00277) (0.00477) (0.00482) (0.00494) (0.00505) (0.00279)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗ ∗∗
EPU Shock4,2 0.0174 0.0248 0.0222 0.0277 −0.0140 −0.0117 −0.0135 −0.00345 0.0300∗∗∗
(0.00307) (0.00313) (0.00316) (0.00327) (0.00522) (0.00514) (0.00537) (0.00553) (0.00322)

PC Shock4,1 × Constrained 0.0104∗

(0.00545)

EPU Shock4,2 × Constrained −0.0368∗∗∗

(0.00573)

Constrained 0.191
(0.233)

Presidential Election −0.00702 −0.00214 0.0112 0.0237∗∗∗ 0.0128 −0.0122 −0.0356∗∗ −0.0253∗ 0.00663
(0.00727) (0.00746) (0.00777) (0.00776) (0.0135) (0.0140) (0.0145) (0.0148) (0.00751)
Observations 125969 122484 119461 116625 95703 89920 84720 79943 196568
Adjusted R2 0.665 0.666 0.667 0.669 0.599 0.608 0.615 0.619 0.667
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the natural log of cash-to-net assets. All regressions include firm fixed-effects and fiscal and calendar-quarter dummy variables. PC Shock4,1 and
EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index ordered second. Constrained firms are defined as those in the bottom 33% of the total assets distribution. Unconstrained
firms are defined as those in the top 33% of the total assets distribution.
4
 Table 4: Net Cash Holdings and Partisan Conflict: Financial Constraint Based on Bond Rating

(1) (2) (3) (4) (5) (6) (7) (8) (9)

LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+4
Unconstrained Constrained
PC Shock4,1 0.0193∗∗∗ 0.0182∗∗∗ 0.0205∗∗∗ 0.0211∗∗∗ 0.0105∗∗∗ 0.0142∗∗∗ 0.00947∗∗∗ 0.0148∗∗∗ 0.0181∗∗∗
(0.00288) (0.00291) (0.00295) (0.00296) (0.00276) (0.00284) (0.00284) (0.00293) (0.00292)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗
EPU Shock4,2 0.0192 0.0234 0.0222 0.0269 −0.00294 0.00357 0.00355 0.00813 0.0270∗∗∗
(0.00325) (0.00339) (0.00335) (0.00351) (0.00306) (0.00306) (0.00322) (0.00330) (0.00331)

PC Shock4,1 × Constrained −0.00105

(0.00399)

EPU Shock4,2 × Constrained −0.0190∗∗∗

(0.00427)

Presidential Election −0.00181 0.00316 0.0120 0.0289∗∗∗ 0.01000 −0.00103 −0.00319 0.0141∗ 0.0209∗∗∗
(0.00778) (0.00790) (0.00823) (0.00822) (0.00782) (0.00795) (0.00811) (0.00806) (0.00582)
Observations 130513 126894 123715 120694 207394 196836 187405 178672 299366
Adjusted R2 0.601 0.603 0.605 0.607 0.644 0.650 0.655 0.658 0.646
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the natural log of cash-to-net assets. All regressions include firm fixed-effects and fiscal and calendar-quarter dummy variables. PC Shock4,1 and
EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index ordered second. Constrained firms are defined as those that have never received an S&P rating and have a positive level of
debt. Unconstrained firms are defined as those that have an S&P rating and issue a positive level of debt. The variable Constrained is collinear with the firm fixed-effects and is not included directly into the regression equation.
5
 Table 5: Net Cash Holdings and Partisan Conflict: Financial Constraint Based on Commercial Paper Rating

(1) (2) (3) (4) (5) (6) (7) (8) (9)

LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+4
Unconstrained Constrained
PC Shock4,1 0.0271∗∗∗ 0.0196∗∗∗ 0.0259∗∗∗ 0.0292∗∗∗ 0.0124∗∗∗ 0.0154∗∗∗ 0.0122∗∗∗ 0.0158∗∗∗ 0.0291∗∗∗
(0.00478) (0.00495) (0.00444) (0.00463) (0.00221) (0.00225) (0.00228) (0.00232) (0.00462)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗
EPU Shock4,2 0.0294 0.0367 0.0319 0.0404 0.00249 0.00786 0.00785 0.0121 0.0311∗∗∗
(0.00539) (0.00532) (0.00536) (0.00550) (0.00246) (0.00249) (0.00258) (0.00266) (0.00504)

PC Shock4,1 × Constrained −0.0128∗∗

(0.00511)

EPU Shock4,2 × Constrained −0.0176∗∗∗

(0.00544)

Presidential Election −0.00667 0.000492 0.00875 0.0221 0.00514 −0.000627 0.000609 0.0189∗∗∗ 0.0208∗∗∗
(0.0122) (0.0129) (0.0134) (0.0134) (0.00621) (0.00628) (0.00644) (0.00641) (0.00587)
Observations 37099 36415 35813 35247 297498 284156 272286 261225 296472
Adjusted R2 0.637 0.638 0.640 0.643 0.632 0.637 0.641 0.643 0.644
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the natural log of cash-to-net assets. All regressions include firm fixed-effects and fiscal and calendar-quarter dummy variables. PC Shock4,1 and
EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index ordered second. Constrained firms are defined as those that have never received an S&P rating and have a positive level of
debt. Unconstrained firms are defined as those that have an S&P rating and issue a positive level of debt. The variable Constrained is collinear with the firm fixed-effects and is not included directly into the regression equation.
6
 Table 6: Net Cash Holdings and Partisan Conflict: Political Sensitivity of Firms

(1) (2) (3) (4) (5) (6) (7) (8) (9)

LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+4
Insensitive Sensitive
PC Shock4,1 0.0144∗∗∗ 0.0165∗∗∗ 0.0146∗∗∗ 0.0159∗∗∗ 0.00889∗∗ 0.0106∗∗∗ 0.00590 0.0179∗∗∗ 0.0175∗∗∗
(0.00217) (0.00219) (0.00220) (0.00225) (0.00387) (0.00406) (0.00414) (0.00415) (0.00223)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗
EPU Shock4,2 0.00650 0.0128 0.0116 0.0146 −0.00140 0.00132 0.00457 0.0110 0.0165∗∗∗
(0.00242) (0.00245) (0.00250) (0.00257) (0.00475) (0.00471) (0.00481) (0.00503) (0.00252)

PC Shock4,1 × Politically Sensitive −0.00326

(0.00447)

EPU Shock4,2 × Politically Sensitive −0.0117∗∗

(0.00474)

Presidential Election 0.00330 −0.000947 0.00165 0.0206∗∗∗ 0.0120 0.00327 −0.000302 0.00744 0.0184∗∗∗
(0.00605) (0.00612) (0.00627) (0.00627) (0.0115) (0.0117) (0.0121) (0.0122) (0.00556)
Observations 293766 280715 269109 258336 87782 84426 81390 78530 336866
Adjusted R2 0.643 0.647 0.651 0.653 0.735 0.737 0.742 0.744 0.681
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the natural log of cash-to-net assets. All regressions include firm fixed-effects and fiscal and calendar-quarter dummy variables. PC Shock4,1 and
EPU Shock4,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index ordered second. Political sensitivity is determined according to SIC codes proposed by Atanassov, Julio, and Leng (2016).
7
Table 7: Net Cash Holdings and Partisan Conflict: Capital Intensity and Re-
deployability

(1) (2)
LN(Cash-to-Net Assetst+4 LN(Cash-to-Net Assetst+4
PC Shock4,1 0.0154∗∗∗ 0.0157∗∗∗
(0.00331) (0.00366)

PC Shock4,1 × Capital Intensity 0.00335

(0.00766)

EPU Shock4,2 0.0214∗∗∗ 0.0204∗∗∗

(0.00361) (0.00414)

EPU Shock4,2 × Capital Intensity −0.0218∗∗∗

(0.00805)

Capital Intensity −0.166∗∗

(0.0757)

PC Shock4,1 × Redeployability 0.00122

(0.00192)

EPU Shock4,2 × Redeployability −0.00349

(0.00213)

Presidential Election 0.0178∗∗∗ 0.0186∗∗∗

(0.00556) (0.00581)
Observations 336672 303868
Adjusted R2 0.681 0.684
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at
the firm level. The dependent variable in all regressions is the natural log of cash-to-net as-
sets. All regressions include firm fixed-effects and fiscal and calendar-quarter dummy variables.
PC Shock4,1 and EPU Shock4,2 refer to the standardized structural PC and EPU shocks, re-
spectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU
Index ordered second. See text for definitions of capital intensity and investment irreversibility.

8
 Table 8: Net Cash Holdings and Partisan Conflict: Controlling for the Post-2008 Period

(1) (2) (3) (4)

LN(Cash-to-Net Assetst+1 LN(Cash-to-Net Assetst+2 LN(Cash-to-Net Assetst+3 LN(Cash-to-Net Assetst+4
PC Shockd4,1 0.00610∗∗∗ 0.00867∗∗∗ 0.00720∗∗∗ 0.0113∗∗∗
(0.00184) (0.00188) (0.00187) (0.00190)

EPU Shockd4,2 −0.00282 0.00383∗ 0.00451∗∗ 0.00980∗∗∗

(0.00205) (0.00206) (0.00211) (0.00219)

Presidential Election 0.00692 0.000351 0.00112 0.0163∗∗∗

(0.00536) (0.00543) (0.00558) (0.00557)
Observations 381548 365141 350499 336866
Adjusted R2 0.671 0.675 0.679 0.681
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the natural log
of cash-to-net assets. All regressions include firm fixed-effects and fiscal and calendar-quarter dummy variables. PC Shockd d
4,1 and EPU Shock4,2 refer to the standardized
structural Partisan Conflict and Economic Policy Uncertainty shocks, respectively, recovered from the four lag SVAR model with the PC Index ordered first, the EPU Index
ordered second, and a dummy variable that equals 1 for all observations occurring after 2008Q4.

9
 Table 9: Summary Statistics for Alternative Shock Specifications

Mean SD Min Max

PC ShockF A,4,2 0.0000 1.0000 −2.6119 2.3430
EPU ShockF A,4,3 0.0000 1.0000 −2.2888 3.9338
PC Shock4,4 0.0000 1.0000 −2.7079 2.3414
EPU Shock4,5 0.0000 1.0000 −2.3933 3.8891
PC Shock4,2 0.0000 1.0000 −2.5789 2.3406
EPU Shock4,1 0.0000 1.0000 −2.2741 3.8299
PC Shock2,1 0.0000 1.0000 −2.5350 2.2791
EPU Shock2,2 0.0000 1.0000 −2.5257 3.6459
PC Shockd2,1 0.0000 1.0000 −2.3453 2.3653
EPU Shockd2,2 0.0000 1.0000 −2.3945 3.5684
PC Shock2,2 0.0000 1.0000 −2.5814 2.3436
EPU Shock2,1 0.0000 1.0000 −2.2992 3.6419
PC Shock2,4 0.0000 1.0000 −2.5979 2.3294
EPU Shock2,5 0.0000 1.0000 −2.3699 3.6799
The shocks listed in this table are used for for the robustness checks in the ap-
pendix. PC ShockF A,4,2 and EPU ShockF A,4,3 refer to the standardized struc-
tural Partisan Conflict and Economic Policy Uncertainty shocks, respectively,
recovered from the four lag factor-augmented SVAR with the PC Index ordered
second and the EPU Index ordered third. PC Shock4,4 and EPU Shock4,5 re-
fer to the standardized structural Partisan Conflict and Economic Policy Un-
certainty shocks, respectively, recovered from the four lag SVAR model with
the PC Index ordered fourth and the EPU Index ordered fifth. PC Shock4,2
and EPU Shock4,1 refer to the standardized structural Partisan Conflict and
Economic Policy Uncertainty shocks, respectively, recovered from the four lag
SVAR model with the PC Index ordered second and the EPU Index ordered
first. PC Shock2,1 and EPU Shock2,2 refer to the standardized structural Par-
tisan Conflict and Economic Policy Uncertainty shocks, respectively, recovered
from the two lag sVAR model with the PC Index ordered first and the EPU In-
dex ordered second. PC Shock2,2 and EPU Shock2,1 refer to the standardized
structural Partisan Conflict and Economic Policy Uncertainty shocks, respec-
tively, recovered from the two lag SVAR model with the PC Index ordered
second and the EPU Index ordered first. PC Shock2,4 and EPU Shock2,5 refer
to the standardized structural Partisan Conflict and Economic Policy Uncer-
tainty shocks, respectively, recovered from the two lag SVAR model with the
PC Index ordered fourth and the EPU Index ordered fifth.

10
 Table 10: Time Series Employed for the Computation of the Factors

N Series Mnemonics Transform

1 Real GDP GDP C96 1
2 Real Gross National Product GN P C96 1
3 Real National Income N ICU R/GDP DEF 1
4 Real Disposable Income DP IC96 1
5 Real Personal Income RP I 1
6 Non-farm Business Sector: Output OU T N F B 1
7 Real Final Sales of Domestic Product F IN SLC96 1
8 Real Gross Private Domestic Inv. GP DIC96 1
9 Real Personal Consumption Exp. P CECC96 1
10 Real Gross Private Saving GP SAV E/GDP DEF 1
11 Federal Government: Current F GEXP N D/GDP DEF 1
Expenditures, Real
12 Federal Government: Current F GRECP T /GDP DEF 1
Receipts, Real
13 Net Federal Government Saving F GDEF 3
14 Govt. Current Exp. /GDP Deflator GEXP N D/GDP DEF 1
15 Govt. Current Receipts/GDP Deflator GRECP T /GDP DEF 1
16 Real Government Consumption GCEC96 1
Expenditure, Gross Investment
17 Real Change in Private Inventories CBIC96 2
18 Real Exports of Goods and Services EXP GSC1 1
19 Real Imports of Goods and Services IM P GSC1 1
20 Corporate Profits After Tax, Real CP/GDP DEF 1
21 Non-financial Corporate Business: N F CP AT AX/GDP DEF 1
Profits after Tax, Real 1
22 Corporate Net Cash Flow, Real CN CF/GDP DEF 1
23 Net Corporate Dividends, Real DIV IDEN D/GDP DEF 1
24 Industrial Production Index IN DP RO 1
25 Industrial Production: Business IP BU SEQ 1
Equipment
26 Industrial Production: Consumer Goods IP CON GD 1
27 Industrial Production: Durable Consumer Goods IP DCON GD 1

28 Industrial Production: Final Products IP F IN AL 1

(Market Group)
29 Industrial Production: Materials IP B53000SQ 1
30 Industrial Production: Non-durable Consumer IP B51200SQ 1
Goods
31 Capacity Utilization: Manufacturing CU M F N 1
32 Industrial Production: Manufacturing IP GM F SQ 1
33 Industrial Production: Durable Manufacturing IP DM AN 1

34 Industrial Production: Mining IP F G21SQ 1

35 Industrial Production: Non-durable Manufacturing IP N M AN 1

36 Industrial Production: Durable Materials IP DM AT 1

37 Industrial Production: Electric and IP G2211A2SQ 1
Gas Utilities

11
N Series Mnemonics Transform
38 ISM Manufacturing: PMI Composite N AP M 2
Index
39 ISM Manufacturing: Production Index N AP M P I 2
40 Average Weekly Overtime Hours of Prod. AW HM AN 2
and Non-supervisory Employees: Manuf.
41 Average Weekly Overtime Hours of Prod. AW OT M AN 3
and Non-supervisory Employees: Manuf.
42 Civilian Labor Force Participation Rate CIV P ART 3
43 Civilian Labor Force CLF 160V 1
44 Civilian Employment CE160V 1
45 All Employees: Total Private Industries U SP RIV 1
46 All Employees: Goods-Producing U SGOOD 1
Industries
47 All Employees: Service-Providing SRV P RD 1
Industries
48 Unemployed U N EM P LOY 1
49 Average(Mean) Duration of Unemployment U EM P M EAN 3
50 Civilian Unemployment Rate U N RAT E 3
51 Nonfarm Business Sector: Hours of All Persons HOAN BS 3
52 Initial Claims ICSA 1
53 Housing Starts: Total: New Privately HOU ST 1
Owned Units Started
54 Housing Starts in Northeast Census HOU ST N E 1
Region
55 Housing Starts in Midwest Census Region HOU ST M W 1
56 Housing Starts in South Census Region HOU ST S 1
57 Housing Starts in West Census Region HOU ST W 1
58 New Private Housing Units Authorized by P ERM IT 1
Building Permits
59 ISM Manufacturing: Inventories Index N AP M II 2
60 Gross Domestic Product: Chain-Type Price Index GDP CT P I 1
61 Gross National Product: Chain-type GN P CT P I 1
Price Index
62 Gross Domestic Product: Implicit Price GDP DEF 1
Deflator
63 Gross National Product: Implict Price GN P DEF 1
Deflator
64 Consumer Price Index for All Urban Consumers: CP IAU CSL 1
All Items
65 Consumer Price Index for All Urban Consumers: CP IU LF SL 1
All Items Less Food
66 Consumer Price Index for All Urban Consumers: CP ILEGSL 1
All Items Less Energy
67 Consumer Price Index for All Urban Consumers: CP ILF ESL 1
All Items Less Food & Energy
68 Consumer Price Index for All Urban Consumers: CP IEN GSL 1
Energy
69 Consumer Price Index for All Urban Consumers: CP IU F DSL 1
Food

12
N Series Mnemonics Transform
70 Producer Price Index: Finished Goods: Capital P P ICP E 1
Equipment
71 Producer Price Index: Crude Materials for Further P P ICRM 1
Processing
72 Producer Price Index: Finished Consumer P P IF CG 1
Goods
73 Producer Price Index: Finished Goods P P IF GS 1
74 Non-farm Business Sector: Hours of All HOAN BS 1
Persons
75 Non-farm Business Sector: Output per Hour of All OP HN F B 1
Persons
76 Non-farm Business Sector: Unit U N LP N BS 1
Non-labor Payments
77 Non-farm Business Sector: Unit U LCN F B 1
labor Cost
78 Compensation of Employees: Wages W ASCU R 1
and Salary Accruals
79 Non-farm Business Sector: COM P N F B 1
Compensation Per Hour
80 Non-farm Business Sector: Real COM P RN F B 1
Conpensation Per Hour
81 Effective Federal Funds Rate F EDF U N DS 3
82 3-Month T-Bill: Secondary Market Rate T B3M S 3
83 1-Year Treasury Constant Maturity Rate GS1 3
84 10-Year Treasury Constant Maturity Rate GS10 3
85 Moody’s Seasoned AAA Corp. Bond Yield AAA 3
86 Moody’s Seasonaed BAA Corp. Bond Yield BAA 3
87 Bank Prime Loan Rate M P RIM E 3
88 GS10-FEDFUNDS Spread GS10 − F EDF U N DS 2
89 GS1-FEDFUNDS Spread GS1 − F EDF U N DS 2
90 BAA-FEDFUNDS Spread BAA − F EDF U N DS 2
91 M1 Money Stock M 1SL 1
92 M2 Less Samll Time Deposits M 2M SL 1
93 M2 Money Stock M 2SL 1
94 Commercial and Industrial Loans at All BU SLOAN S 1
Commercial Banks 1
95 Consumer Loans at All Commercial Banks CON SU M ERSA 1
96 Bank Credit at All Commercial Banks LOAN IN V 1
97 Real Estate Loans at All Comercial Banks REALLN 1
98 Total Consumer Credit Owned and T OT ALSL 1
Securitised, Outstanding
99 St. Louis Adjusted Monetary Base AM BSL 1
100 Trade Weighted US Dollar Index: Major T W EXM M T H 3
Currencies
101 Switzerland/US Foreign Exchange Rate EXSZU S 1
102 Japan/US Foreign Exchange Rate EXJP U S 1
103 U.K./US Foreign Exchange Rate EXU SU K(−1) 1
104 Canada/US Foreign Exchange Rate EXCAU S 1

13
N Series Mnemonics Transform
105 Personal consumption expenditures: DHLCRC1Q− 1
Services: Health care, Real 027SBEA
106 Personal consumption expenditures: DHLCRG3Q− 1
Services:HealthCare (chain-type price index) 086SBEA
Note: “Transform” indicates the transformation applied to the series (1 = first difference
of logarithm, 2 = level, 3 = first difference). Source: Federal Reserve Bank of St. Louis’
and Bureau of Economic Analysis websites.

14
Table 11: Cash Holdings and Partisan Conflict with PC Shock ordered 2nd and EPU Shock
ordered 3rd in FA-SVAR Model

(1) (2) (3) (4)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4
PC ShockF A,4,2 0.000975∗∗∗ 0.00118∗∗∗ 0.000967∗∗∗ 0.00131∗∗∗
(0.000176) (0.000175) (0.000175) (0.000176)

EPU ShockF A,4,3 −0.000818∗∗∗ −0.000578∗∗∗ −0.000673∗∗∗ −0.0000782

(0.000192) (0.000192) (0.000198) (0.000200)

Presidential Election 0.000810 −0.000300 −0.000366 0.00106∗∗

(0.000509) (0.000512) (0.000526) (0.000528)
Observations 384674 368123 353266 339640
Adjusted R2 0.731 0.737 0.742 0.744
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level.
The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm
fixed-effects and fiscal and calendar-quarter dummy variables. PC ShockF A,4,2 and EPU ShockF A,4,3 refer to the
standardized structural PC and EPU shocks, respectively, recovered from the 4 lag FA-VAR model with the PC
Index ordered second and the EPU Index ordered third.

15
Table 12: Cash Holdings and Partisan Conflict with PC Shock ordered 4th and EPU Shock ordered
5th

(1) (2) (3) (4)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4
PC Shock4,4 0.000530∗∗∗ 0.000793∗∗∗ 0.000630∗∗∗ 0.000990∗∗∗
(0.000166) (0.000165) (0.000166) (0.000168)

EPU Shock4,5 −0.000523∗∗∗ −0.000266 −0.000494∗∗ 0.00000457

(0.000201) (0.000201) (0.000206) (0.000206)

Presidential Election 0.000653 −0.000459 −0.000524 0.000937∗

(0.000511) (0.000513) (0.000528) (0.000530)
Observations 387359 370666 355718 341909
Adjusted R2 0.730 0.736 0.741 0.743
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The
dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-
effects and fiscal and calendar-quarter dummy variables. PC Shock4,4 and EPU Shock4,5 refer to the standardized
structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered fourth
and the EPU Index ordered last.

16
Table 13: Cash Holdings and Partisan Conflict with PC Shock ordered 2nd & EPU Shock ordered
1st in SVAR

(1) (2) (3) (4)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4
PC Shock4,2 0.000897∗∗∗ 0.00109∗∗∗ 0.000871∗∗∗ 0.00109∗∗∗
(0.000170) (0.000171) (0.000172) (0.000172)

EPU Shock4,1 −0.000204 0.0000742 −0.0000687 0.000588∗∗∗

(0.000197) (0.000195) (0.000201) (0.000203)

Presidential Election 0.000604 −0.000517 −0.000583 0.000854

(0.000511) (0.000513) (0.000528) (0.000530)
Observations 387359 370666 355718 341909
Adjusted R2 0.730 0.736 0.741 0.743
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The
dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-
effects and fiscal and calendar-quarter dummy variables. PC Shock4,2 and EPU Shock4,1 refer to the standardized
structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first
and the EPU Index ordered second.

17
Table 14: Cash Holdings and Partisan Conflict: Results Using PC & EPU Shocks From 2-lag
SVAR

(1) (2) (3) (4)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4
PC Shock2,1 0.000585∗∗∗ 0.000627∗∗∗ 0.000440∗∗ 0.000812∗∗∗
(0.000171) (0.000171) (0.000172) (0.000170)

EPU Shock2,2 −0.000625∗∗∗ −0.000157 −0.0000896 0.000461∗

(0.000242) (0.000244) (0.000247) (0.000247)

Presidential Election 0.000416 −0.000696 −0.000787 0.000666

(0.000514) (0.000516) (0.000531) (0.000533)
Observations 392478 375499 360367 346363
Adjusted R2 0.729 0.735 0.739 0.742
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The
dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-
effects and fiscal and calendar-quarter dummy variables. PC Shock2,1 and EPU Shock2,2 refer to the standardized
structural PC and EPU shocks, respectively, recovered from a two lag SVAR model with the PC Index ordered first
and the EPU Index ordered second.

18
 Table 15: Cash Holdings and Partisan Conflict: Constrained and Unconstrained Firms Based on Size using 2-lag SVAR Shocks

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
PC Shock2,1 0.000551∗∗∗ 0.000587∗∗∗ 0.000486∗∗∗ 0.000587∗∗∗ 0.00144∗∗∗ 0.00150∗∗∗ 0.00129∗∗ 0.00211∗∗∗ 0.000350∗∗
(0.000162) (0.000163) (0.000165) (0.000165) (0.000505) (0.000500) (0.000515) (0.000514) (0.000175)

EPU Shock2,2 0.00107∗∗∗ 0.00143∗∗∗ 0.00127∗∗∗ 0.00155∗∗∗ −0.00306∗∗∗ −0.00239∗∗∗ −0.00280∗∗∗ −0.00123∗ 0.00183∗∗∗
(0.000249) (0.000252) (0.000256) (0.000260) (0.000669) (0.000669) (0.000704) (0.000711) (0.000279)

PC Shock2,1 × Constrained 0.00201∗∗∗

(0.000476)

EPU Shock2,2 × Constrained −0.00335∗∗∗

(0.000611)

Constrained 0.0313
(0.0246)

Presidential Election −0.000669 −0.000408 0.000655 0.00186∗∗∗ 0.00193 −0.00175 −0.00417∗∗ −0.00320∗ −0.0000399
(0.000464) (0.000472) (0.000491) (0.000502) (0.00153) (0.00159) (0.00166) (0.00169) (0.000734)
Observations 128985 125400 122303 119389 99414 93416 87986 83069 202458
Adjusted R2 0.733 0.734 0.734 0.737 0.628 0.638 0.645 0.649 0.705
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and
fiscal and calendar-quarter dummy variables. PC Shock2,1 and EPU Shock2,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index
ordered second. Constrained firms are defined as those in the bottom 33% of the total assets distribution. Unconstrained firms are defined as those in the top 33% of the total assets distribution.
19
 Table 16: Cash Holdings and Partisan Conflict: Financial Constraint Based on Bond Rating using 2-lag SVAR shocks

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
Unconstrained Constrained
PC Shock2,1 0.000557∗∗∗ 0.000598∗∗∗ 0.000562∗∗∗ 0.000772∗∗∗ 0.000622∗∗∗ 0.000695∗∗∗ 0.000523∗∗ 0.000939∗∗∗ 0.000568∗∗∗
(0.000191) (0.000192) (0.000197) (0.000196) (0.000240) (0.000241) (0.000242) (0.000242) (0.000187)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗
EPU Shock2,2 0.00126 0.00152 0.00126 0.00169 −0.00141 −0.000898 −0.000777 −0.000118 0.00169∗∗∗
(0.000278) (0.000285) (0.000285) (0.000288) (0.000308) (0.000313) (0.000324) (0.000326) (0.000265)

PC Shock2,1 × Constrained 0.000481∗

(0.000279)

EPU Shock2,2 × Constrained −0.00179∗∗∗

(0.000352)

Presidential Election 0.0000147 −0.0000469 0.000632 0.00183∗∗∗ 0.000800 −0.000915 −0.00132∗ 0.0000197 0.000796
(0.000546) (0.000551) (0.000569) (0.000566) (0.000712) (0.000717) (0.000748) (0.000758) (0.000502)
Observations 133697 129957 126700 123610 214579 203574 193755 184740 308350
Adjusted R2 0.659 0.662 0.664 0.665 0.707 0.714 0.718 0.719 0.716
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and fiscal and
calendar-quarter dummy variables. PC Shock2,1 and EPU Shock2,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index ordered second.
Constrained firms are defined as those that have never received an S&P rating and have a positive level of debt. Unconstrained firms are defined as those that have an S&P rating and issue a positive level of debt.
20
 Table 17: Cash Holdings and Partisan Conflict: Financial Constraint Based on Commercial Paper Rating using 2-lag SVAR Shocks

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
Unconstrained Constrained
PC Shock2,1 0.000764∗∗∗ 0.000645∗∗∗ 0.000995∗∗∗ 0.00104∗∗∗ 0.000567∗∗∗ 0.000678∗∗∗ 0.000479∗∗∗ 0.000873∗∗∗ 0.00100∗∗∗
(0.000261) (0.000245) (0.000258) (0.000261) (0.000180) (0.000181) (0.000182) (0.000182) (0.000257)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗
EPU Shock2,2 0.00182 0.00214 0.00147 0.00202 −0.000730 −0.000292 −0.000224 0.000336 0.00161∗∗∗
(0.000378) (0.000377) (0.000359) (0.000384) (0.000238) (0.000242) (0.000248) (0.000248) (0.000320)

PC Shock2,1 × Constrained −0.000119

(0.000300)

EPU Shock2,2 × Constrained −0.00119∗∗∗

(0.000356)

Presidential Election −0.000202 −0.000157 0.000573 0.00158∗∗ 0.000438 −0.000726 −0.000797 0.000562 0.000767
(0.000676) (0.000714) (0.000776) (0.000805) (0.000535) (0.000537) (0.000558) (0.000562) (0.000503)
Observations 38119 37409 36794 36218 306805 292928 280607 269206 305424
Adjusted R2 0.656 0.656 0.654 0.657 0.704 0.710 0.714 0.715 0.716
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and fiscal
and calendar-quarter dummy variables. PC Shock2,1 and EPU Shock2,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index ordered
second. Constrained firms are defined as those that have never received an S&P rating and have a positive level of debt. Unconstrained firms are defined as those that have an S&P rating and issue a positive level of debt.
21
 Table 18: Cash Holdings and Partisan Conflict: Political Sensitivity of Firms using 2-lag SVAR Shocks

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4 Cash Holdingst+4
Insensitive Sensitive
PC Shock2,1 0.000465∗∗ 0.000523∗∗∗ 0.000432∗∗ 0.000709∗∗∗ 0.000736∗ 0.000731∗ 0.000273 0.000953∗∗ 0.000789∗∗∗
(0.000189) (0.000189) (0.000188) (0.000189) (0.000378) (0.000382) (0.000389) (0.000378) (0.000184)
∗∗ ∗∗
EPU Shock2,2 −0.000362 −0.0000104 0.0000491 0.000537 −0.00132 −0.000474 −0.000388 0.000346 0.000722∗∗∗
(0.000265) (0.000266) (0.000271) (0.000271) (0.000594) (0.000593) (0.000598) (0.000596) (0.000261)

PC Shock2,1 × Politically Sensitive 0.000106

(0.000379)

EPU Shock2,2 × Politically Sensitive −0.00113∗∗

(0.000501)

Presidential Election 0.0000948 −0.000737 −0.000708 0.000934 0.000839 −0.00127 −0.00167 −0.000803 0.000671
(0.000563) (0.000564) (0.000579) (0.000581) (0.00122) (0.00124) (0.00128) (0.00130) (0.000533)
Observations 302451 288942 276927 265834 90027 86557 83440 80529 346363
Adjusted R2 0.690 0.696 0.700 0.702 0.791 0.796 0.801 0.804 0.742
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-effects and
fiscal and calendar-quarter dummy variables. PC Shock2,1 and EPU Shock2,2 refer to the standardized structural PC and EPU shocks, respectively, recovered from the 4 lag VAR model with the PC Index ordered first and the EPU Index
ordered second. Political sensitivity is determined according to SIC codes proposed by INSERT CITE
22
Table 19: Cash Holdings and Partisan Conflict: Capital Intensity
and Redeployability using 2-lag SVAR Shocks

(1) (2)
Cash Holdingst+4 Cash Holdingst+4
PC Shock2,1 0.000778∗∗∗ 0.000717∗∗
(0.000288) (0.000293)

PC Shock2,1 × Capital Intensity 0.0000725

(0.000598)

EPU Shock2,2 0.000894∗∗ 0.000645

(0.000394) (0.000411)

EPU Shock2,2 × Capital Intensity −0.00123∗

(0.000740)

Capital Intensity −0.0129

(0.00814)

PC Shock2,1 × Redeployability 0.000106

(0.000137)

EPU Shock2,2 × Redeployability −0.0000359

(0.000183)

Presidential Election 0.000631 0.000779

(0.000533) (0.000555)
Observations 346160 312494
Adjusted R2 0.742 0.748
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are
clustered at the firm level. The dependent variable in all regressions is the ratio
of cash holdings to total assets. All regressions include firm fixed-effects and fiscal
and calendar-quarter dummy variables. PC Shock2,1 and EPU Shock2,2 refer to
the standardized structural PC and EPU shocks, respectively, recovered from the
4 lag VAR model with the PC Index ordered first and the EPU Index ordered
second. See text for definitions of capital intensity and investment irreversibility.

23
Table 20: Cash Holdings and Partisan Conflict: Results Using PC & EPU Shocks From 2-lag
SVAR with post-2008 Dummy Variable

(1) (2) (3) (4)

Cash Holdingst+1 Cash Holdingst+2 Cash Holdingst+3 Cash Holdingst+4
PC Shockd
2,1 0.000252 0.000419∗∗ 0.000377∗∗ 0.000765∗∗∗
(0.000170) (0.000171) (0.000170) (0.000169)

EPU Shockd
2,2 −0.000778∗∗∗ −0.000330 −0.000279 0.000260
(0.000229) (0.000230) (0.000234) (0.000234)

Presidential Election 0.000428 −0.000726 −0.000814 0.000564

(0.000515) (0.000517) (0.000531) (0.000534)
Observations 392478 375499 360367 346363
Adjusted R2 0.729 0.735 0.739 0.742
∗
p < .10, ∗∗ p < .05, ∗∗∗ p < .01. Parentheses contain standard errors that are clustered at the firm level. The
dependent variable in all regressions is the ratio of cash holdings to total assets. All regressions include firm fixed-
effects and fiscal and calendar-quarter dummy variables. PC Shockd d
2,1 and EPU Shock2,2 refer to the standardized
structural Partisan Conflict and Economic Policy Uncertainty shocks, respectively, recovered from the two lag
SVAR model with the PC Index ordered first, the EPU Index ordered second, and a dummy variable that equals
1 for all observations occurring after 2008Q4.

24
Figure 1: PC and EPU Shocks from 4-Lag SVAR Model with PC Index ordered 4th and EPU Index ordered
5th

−1

−2

−3
1986−01−01

1988−01−01

1990−01−01

1992−01−01

1994−01−01

1996−01−01

1998−01−01

2000−01−01

2002−01−01

2004−01−01

2006−01−01

2008−01−01

2010−01−01

2012−01−01

2014−01−01

2016−01−01
PC Shock EPU Shock

Note: PC and EPU shocks recovered from a 4-lag SVAR model. The shocks are standardized to have a mean of zero
and a standard deviation of one. The y-axis measures standard deviations.

25
Figure 2: PC and EPU Shocks from 4-Lag SVAR Model with EPU Index ordered 1st and PC Index ordered
2nd

−1

−2
1986−01−01

1988−01−01

1990−01−01

1992−01−01

1994−01−01

1996−01−01

1998−01−01

2000−01−01

2002−01−01

2004−01−01

2006−01−01

2008−01−01

2010−01−01

2012−01−01

2014−01−01

2016−01−01

PC Shock EPU Shock

Note: PC and EPU shocks recovered from a 4-lag SVAR model. The shocks are standardized to have a mean of zero
and a standard deviation of one. The y-axis measures standard deviations.

26
 Figure 3: PC and EPU Shocks from 2-Lag SVAR Model

−1

−2
1986−01−01

1988−01−01

1990−01−01

1992−01−01

1994−01−01

1996−01−01

1998−01−01

2000−01−01

2002−01−01

2004−01−01

2006−01−01

2008−01−01

2010−01−01

2012−01−01

2014−01−01

2016−01−01

PC Shock EPU Shock

Note: PC and EPU shocks recovered from a 2-lag SVAR model. The shocks are standardized to have a mean of zero
and a standard deviation of one. The y-axis measures standard deviations.

27
 Figure 4: PC and EPU Shocks from 2-Lag SVAR Model. Accounting for Post-2008 Period

−1

−2
1986−01−01

1988−01−01

1990−01−01

1992−01−01

1994−01−01

1996−01−01

1998−01−01

2000−01−01

2002−01−01

2004−01−01

2006−01−01

2008−01−01

2010−01−01

2012−01−01

2014−01−01

2016−01−01
PC Shock EPU Shock

Note: PC and EPU shocks are recovered from a 2-lag SVAR model with the PC Index ordered first and the EPU
Index ordered second and a dummy variable that equals one for observations beginning with 2009Q1. The shocks
are standardized to have a mean of zero and a standard deviation of one. The y-axis measures standard deviations.

28
Figure 2: PC and EPU Shocks from 4-Lag SVAR Model for 1986Q1 – 2014Q4. Accounting for Post-2008
Period

−1

−2
1986−01−01

1988−01−01

1990−01−01

1992−01−01

1994−01−01

1996−01−01

1998−01−01

2000−01−01

2002−01−01

2004−01−01

2006−01−01

2008−01−01

2010−01−01

2012−01−01

2014−01−01

2016−01−01

PC Shock EPU Shock

Note: PC and EPU shocks are recovered from a 4-lag SVAR model with the PC Index ordered first and the EPU
Index ordered second and a dummy variable that equals one for observations beginning with 2009Q1. The shocks
are standardized to have a mean of zero and a standard deviation of one. The y-axis measures standard deviations.

69