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Corporate investment decisions under political uncertainty

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  • Marina Riem

Abstract

I investigate how political uncertainty influences corporate investment decisions employing a unique panel dataset of German manufacturing firms. I use data on firms’ self-reported investment realizations, plans and revisions. The firm-specific user cost of capital captures the current institutional framework, but does not reflect the uncertainty about changes in government policies firms are faced with. I therefore augment the neo-classical investment model by a measure of political uncertainty resulting from the electoral process. The results show that realized investment ratios decreased by 10.5% in years when state elections occurred relative to the average investment ratio in years with no state election. Firms however seem to anticipate electoral uncertainty already when making investment plans and hardly revise their plans. Investment revisions occur because of updated information about realized sales growth and not because of resolved electoral uncertainty. I also find that electoral uncertainty negatively influences add-on investments which face a high degree of irreversibility, while non-capacity expanding investments are not influenced by electoral uncertainty.

Suggested Citation

  • Marina Riem, 2016. "Corporate investment decisions under political uncertainty," ifo Working Paper Series 221, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  • Handle: RePEc:ces:ifowps:_221
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    Cited by:

    1. Marina Riem, 2016. "Does political uncertainty influence firm owners‘ business perceptions?," ifo Working Paper Series 226, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. repec:eee:eecrev:v:104:y:2018:i:c:p:38-67 is not listed on IDEAS
    3. Björn Kauder & Manuela Krause & Niklas Potrafke, 2018. "Electoral cycles in MPs’ salaries: evidence from the German states," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 981-1000, August.
    4. Kauder, Björn & Potrafke, Niklas & Reischmann, Markus, 2016. "Do politicians reward core supporters? Evidence from a discretionary grant program," European Journal of Political Economy, Elsevier, vol. 45(C), pages 39-56.

    More about this item

    Keywords

    Firm-level investment; user cost of capital; political uncertainty; elections; survey data; panel data;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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