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Politics, State Ownership, and Corporate Investments

Author

Listed:
  • Shashwat Alok
  • Meghana Ayyagari

Abstract

We document a political cycle in the investment decisions of state-owned enterprises (SOEs) by using the constitutionally mandated election schedule in India as a source of exogenous variation in politicians’ incentive to cater to voters. Using a project-level investment database, we find that SOEs announce more capital expenditure projects in election years, especially in infrastructure, and in districts with close elections, high-ranking politicians, and left-wing incumbents. SOE projects in election years have negative announcement returns, suggesting a loss in shareholder value. These patterns are not seen in nongovernment firms or in off-election years. (JEL G31, G38, D72, D73, P16)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Shashwat Alok & Meghana Ayyagari, 2020. "Politics, State Ownership, and Corporate Investments," The Review of Financial Studies, Society for Financial Studies, vol. 33(7), pages 3031-3087.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:7:p:3031-3087.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz102
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    Citations

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    Cited by:

    1. Barraza, Santiago & Rossi, Martín A & Ruzzier, Christian A, 2022. "Sleeping with the enemy: The perils of having the government on(the)board," Journal of Comparative Economics, Elsevier, vol. 50(3), pages 641-651.
    2. Saibal Ghosh, 2023. "Political connections and bank behaviour," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(1), February.
    3. Ting Wang & Rujun Wang & Hua Zhang, 2022. "Does Industrial Policy Reduce Corporate Investment Efficiency? Evidence from China," Sustainability, MDPI, vol. 15(1), pages 1-23, December.
    4. Wadhwa, Kavita & Syamala, Sudhakara Reddy, 2023. "Are business groups different from other family firms? Evidence from corporate investments during political uncertainty," Emerging Markets Review, Elsevier, vol. 54(C).
    5. Feldman, David & Kang, Chang-Mo & Li, Jiaming & Saxena, Konark, 2021. "Politically motivated corporate decisions as tournament participation/inclusion games," Journal of Corporate Finance, Elsevier, vol. 67(C).
    6. Neeru Chaudhry & Chris Veld, 2023. "Political uncertainty and investments by private and state‐owned enterprises," International Review of Finance, International Review of Finance Ltd., vol. 23(3), pages 584-614, September.
    7. Hu, Jun & Long, Wenbin & Luo, Le & Peng, Yuanhuai, 2021. "Share pledging and optimism in analyst earnings forecasts: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 132(C).
    8. Ghosh, Saibal, 2022. "Elections and provisioning behavior: Assessing the Indian evidence," Economic Systems, Elsevier, vol. 46(1).
    9. Mario Daniele Amore & Margherita Corina, 2021. "Political elections and corporate investment: International evidence," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(9), pages 1775-1796, December.
    10. Oleksandr Talavera & Shuxing Yin & Mao Zhang, 2022. "Political motives of excess leverage in state-owned firms," Discussion Papers 22-04, Department of Economics, University of Birmingham.
    11. Goodell, John & Li, Mingsheng & Liu, Desheng, 2021. "Price informativeness and state-owned enterprises: Considering their heterogeneity," International Review of Financial Analysis, Elsevier, vol. 76(C).
    12. Finn Tarp & Sam Jones & Felix Schilling, 2021. "Doing business while holding public office: Evidence from Mozambique’s firm registry," DERG working paper series 21-08, University of Copenhagen. Department of Economics. Development Economics Research Group (DERG).
    13. Saibal Ghosh, 2020. "Bank Lending and Monetary Transmission: Does Politics Matter?," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(2), pages 359-381, June.

    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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