Investment Around U.S. Gubernatorial Elections

Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections

“…Due to the irreversibility of investments, firms would exercise their real option to delay investment when facing higher uncertainty. The prediction is empirically confirmed by Leahy and Whited (1996) and Guiso and Parigi (1999) for general uncertainty and by Julio and Yook (2012) and Jens (2016) in the setting of political uncertainty. Similar to corporate investments, IPO is also a (partially) irreversible action.…”

“…Rodrick (1991) shows that even moderate policy uncertainty can significantly reduce investments. Julio and Yook (2012) and Jens (2016) document the negative relation between political uncertainty and firm investments. Durnev (2013) shows that corporate investment is less efficient when political uncertainty is high.…”

“…Liu, Phong, and Ngo (2014) document that bank failure is lower during gubernatorial elections in the United States. Gao and Qi (2013) find that municipal bond yields increase, and Jens (2016) shows that corporate investment is lower during such times. Our paper is the first to study corporate financing decisions under such uncertainty.…”

Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital

“…The baseline results suggest that the FDI flow rate falls by approximately 12% relative to nonelection years, all else being equal. The magnitude of decline in the FDI rate compares to an average reduction in domestic corporate investment around election cycles of 4.8% documented by Julio and Yook (2012) and 4.5% by Jens (2012), suggesting that FDI is more sensitive to policy uncertainty than is domestic investment. To address the concern that incumbents may opportunistically time elections to maximize their chance of re-election and thereby induce a correlation between election timing and economic activity, we repeat the tests with the subsample of countries for which elections are fixed in time by electoral law.…”

“…To measure policy uncertainty, we employ the approach of Durnev (2010), Gao and Qi (2013), Jens (2012), Julio and Yook (2012) and Colak, Durnev and Qian (2013) and utilize the timing of elections as a measure of variation in political uncertainty. Specifically, we examine direct investment and portfolio investment flows around the timing of national elections in destination countries around the world.…”