European Business Schools Librarian's Group
HEC Research Papers Series,
HEC Paris
No 1600: Political Conflict and Corporate Policies: Evidence from the Basque Country
François Derrien, Stavriana Hadjigavriel, Jose M. Martin-Flores and Arthur Romec
Additional contact information
François Derrien: HEC Paris - Finance Department
Stavriana Hadjigavriel: CUNEF University
Jose M. Martin-Flores: CUNEF University
Arthur Romec: Toulouse Business School
Abstract: This paper examines how political conflict affects corporate policies focusing on the Spanish Basque Country. We exploit the announcement by the Basque nationalist terrorist group ETA of the definitive cessation of its armed and extortion activities as an exogenous shock to the exposure of firms in the Basque Country and Navarre to extortion risk. We find that, following the announcement, firms in these regions significantly increase their cash holdings and exhibit higher cash flow sensitivity of cash. They also reduce investment in fixed assets and rely less on short-term debt, consistent with a shift away from strategic liquidity minimization under extortion risk. Finally, firm performance improves. Overall, the results suggest that political conflict distorts cash management, financing choices, and investment decisions.
Keywords: Cash holdings; Political conflict; Revolutionary tax; Corporate policies
71 pages, First version: December 1, 2025. Revised: December 18, 2025.
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