Political Uncertainty and Investment: Causal Evidence from U.S. Gubernatorial Elections
60 Pages Posted: 17 Nov 2012 Last revised: 20 Jan 2016
Date Written: January 20, 2016
I examine the link between political uncertainty and firm investment using U.S. gubernatorial elections as a source of plausibly exogenous variation in uncertainty. Investment declines 5% before all elections and up to 15% for subsamples of firms particularly susceptible to political uncertainty. I use term limits as an IV for election closeness. Because close elections are related to economic downturns, I find that the effect of close elections on investment is understated by more than half by OLS. Post-election rebounds in investment depend on whether an incumbent is re-elected. Finally, I provide evidence that firms delay SEOs tied to investments during higher uncertainty.
Keywords: investment, political uncertainty, gubernatorial elections
JEL Classification: G38, G32, H70
Suggested Citation: Suggested Citation