Political Uncertainty and Corporate Investment Cycles




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    • Julio is at London Business School and Yook is at the Graduate School of Business at Sungkyunkwan University. We thank Patrick Bolton, Murillo Campello, Ethan Cohen-Cole, Alex Edmans, Zsuzsanna Fluck, Paolo Fulghieri, Dirk Hackbarth, Cam Harvey (Editor), Li Jin, Tae-Young Kim, Stewart Myers, Bang Nguyen-Dang, Meijun Qian, Philipp Schnabl, Vikrant Vig, Michael Weisbach, Toni Whited, two anonymous referees, and an Associate Editor who provided useful comments as did seminar participants at the China Europe International Business School, Georgetown University, Hong Kong Baptist University, Hong Kong Polytechnic University, Korea University, London School of Economics, Nanyang Technological University, Norwegian School of Economics and Business Administration, Seoul National University, Sungkyunkwan University, University of North Carolina at Chapel Hill, the 2008 China International Conference in Finance, the 2008 AsianFA-NFA International Conference, the 2009 Paris Spring Corporate Finance Conference, the 2009 Singapore International Conference on Finance, the 2009 European Finance Association Conference, the 2010 American Finance Association Conference, and the 2010 Finance Down Under Conference.


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.