Affiliation:
1. Finance Department Martin J. Whitman School of Management at Syracuse University Syracuse New York USA
2. Economics & Risk Analysis, Supervision Risk and Analysis Office of the Comptroller of the Currency Washington District of Columbia USA
Abstract
AbstractWe show empirically that firms increase cash holdings starting as early as one year before prescheduled (i.e., predictable) elections. Then, for four quarters around elections when uncertainty and external financing costs are high, firms decrease investment and draw down saved cash balances to avoid tapping external financing. We use a dynamic model of firm investment and saving to demonstrate the importance of anticipation of future financing costs to firms' pre‐election precautionary saving behavior. Theoretically, if election uncertainty were only to affect potential investment, lower firm investment would result in higher contemporaneous cash balances, which is inconsistent with our empirical results.