Geopolitical risk, cash holdings, and political connection: new evidence from India

Purpose This paper aims to investigate the influence of geopolitical risk (GPR) on cash holdings and the moderating roles of cash flow sensitivity and political connections. In addition, this study also examines whether GPR’s effect on cash holdings varies across market competition and financial constraints. Design/methodology/approach Using a panel data set of 1,725 Indian-listed firms between 2009 and 2022, this study uses fixed effects regression with one- and two-way clustered standard errors. To ensure robustness, the study uses alternative measures of cash holdings, political connections and GPR, along with quantile regression, heterogeneity analysis and addressing endogeneity through the entropy balancing method, two-step system generalized method of moments (GMM), two-stage least squares and incremental GPR effects estimation. Findings Utilizing a news-based GPR index and hand-collected political connection data, the results show that heightened GPR leads to increased cash holdings. However, politically connected companies hold less cash than nonconnected ones during uncertain periods, benefiting from policy insights and external funding. While firms generally adjust cash holdings based on cash flow during high-risk periods. These findings remain robust across alternative measures, heterogeneity analysis and endogeneity checks. Cross-sectional analysis reveals that GPR’s effect on cash holdings is more pronounced in competitive industries and financially unconstrained firms. Practical implications The influence of political connections on the relationship between GPR and cash holdings carries significant policy implications. Since political ties provide firms with external funding access and policy advantages, they may create an uneven playing field, giving connected firms an unfair competitive edge. Policymakers should ensure that such affiliations do not distort market competition, exacerbate inefficiencies or impose unnecessary economic costs. Originality/value To the best of the authors’ knowledge, this study is the first to examine how political affiliation of firms shapes the relationship between cash holdings, cash flow sensitivity and GPR, revealing that politically associated companies rely less on cash flows for liquidity during uncertainty. Furthermore, it introduces a novel, multifaceted measure of political connections that incorporates political donations, promoter involvement and a combined metric to disentangle the individual and aggregate effects of political affiliations on corporate cash holdings.