Politics, State Ownership, and Corporate Investments

Shashwat Alok and Meghana Ayyagari

The Review of Financial Studies, 2020, vol. 33, issue 7, 3031-3087

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.

Date: 2020
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