Political Uncertainty and Corporate Investment Cycles

  • Author(s): BRANDON JULIO, YOUNGSUK YOOK
  • Published: Jan 17, 2012
  • Pages: 45-83
  • DOI: 10.1111/j.1540-6261.2011.01707.x

ABSTRACT

We document cycles in corporate investment corresponding with the timing of national elections around the world. During election years, firms reduce investment expenditures by an average of 4.8% relative to nonelection years, controlling for growth opportunities and economic conditions. The magnitude of the investment cycles varies with different country and election characteristics. We investigate several potential explanations and find evidence supporting the hypothesis that political uncertainty leads firms to reduce investment expenditures until the electoral uncertainty is resolved. These findings suggest that political uncertainty is an important channel through which the political process affects real economic outcomes.

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