Political Favoritism and Value of Corporate Cash Holdings

ABSTRACT This paper examines the impact of political favoritism on the value of corporate cash holdings. We define stock ownership by a member of the US Congress as a measure of political favoritism to a firm. We hypothesize that political investment in a firm influences the value of cash holdings. Consistent with our hypothesis, this study finds cash holding, on average, is less valuable for politically favored firms. Economically, political favoritism is associated with a decrease of $0.44 in value for a $1.00 cash holding. We also find that political favoritism negatively affects cash value in financially unconstrained firms, which is consistent with the overinvestment hypothesis. The results are robust to controlling for many firm‐level characteristics and a spectrum of robustness tests. This study extends the literature on the role of political economy in the value of corporate cash holdings by documenting political favoritism as the stock ownership of the US Congress members and evaluating its effect on the value of corporate cash holdings.