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Political uncertainty and investment: Causal evidence from U.S. gubernatorial elections

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  • Jens, Candace E.

Abstract

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 instrumental variable (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 ordinary least squares (OLS). Post-election rebounds in investment depend on whether an incumbent is re-elected. Finally, I provide evidence that firms delay equity and debt issuances tied to investments before elections.

Suggested Citation

  • Jens, Candace E., 2017. "Political uncertainty and investment: Causal evidence from U.S. gubernatorial elections," Journal of Financial Economics, Elsevier, vol. 124(3), pages 563-579.
  • Handle: RePEc:eee:jfinec:v:124:y:2017:i:3:p:563-579
    DOI: 10.1016/j.jfineco.2016.01.034
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    1. repec:kap:jrefec:v:56:y:2018:i:3:d:10.1007_s11146-017-9615-2 is not listed on IDEAS
    2. repec:eee:eecrev:v:104:y:2018:i:c:p:38-67 is not listed on IDEAS
    3. Dodge Cahan & Niklas Potrafke, 2017. "The Democratic-Republican Presidential Growth Gap and the Partisan Balance of the State Governments," CESifo Working Paper Series 6517, CESifo Group Munich.

    More about this item

    Keywords

    Investment; Political uncertainty; Gubernatorial elections;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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