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

Candace E. Jens

Journal of Financial Economics, 2017, vol. 124, issue 3, 563-579

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.

Keywords: Investment; Political uncertainty; Gubernatorial elections (search for similar items in EconPapers)
JEL-codes: G31 G32 G38 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jfinec:v:124:y:2017:i:3:p:563-579