Local Gambling Preference and Corporate Cash Policy

Abstract

This paper studies the relation between local attitudes towards gambling and corporate liquidity. I find that firms exposed to stronger gambling preference hold significantly more cash, because cash enables them to take more risk while staying away from financial distress. Furthermore, I show that gambling-prone firms hold more cash only when they are financially constrained, and these firms also have higher marginal value of cash holding. Corporate headquarter relocation confirms the causal impact of gambling preference on cash holding. Taken together, these findings suggest that greater cash holding in gambling-prone firms is a value-increasing policy due to their strong risk-taking incentive.