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.

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.THE RELATIONSHIP BETWEEN POLITICS and economic outcomes has a long history in research and public debate. One important way in which politics is hypothesized to influence real decisions is through the channel of uncertainty and instability. In particular, the incentives and uncertainties associated with possible changes in government policy or national leadership have implications for the behavior of both politicians and firms. The effects of policy uncertainty are especially relevant in light of the recent financial crisis and recession. There is a great deal of uncertainty as to how governments will shape policy to stimulate investment in the short run and formulate regulatory and economic policy in the long run. It has been argued that this uncertainty itself may be hindering a recovery by inducing firms to delay investment until the uncertainty related to future financial regulation and macroeconomic policy is resolved. 46The Journal of Finance R In this paper, we examine the effects of political uncertainty on the investment behavior of firms in the context of national elections. Elections in which the national leader is determined provide an interesting setting to study the effects of political uncertainty on investment for two important reasons. First, while standard models of policy typically assume a single welfare-maximizing planner that makes policy choices over the entire life of the economy, the real world is characterized by leaders who face limited terms and may be replaced by other leaders with different policy preferences. Election outcomes are relevant to corporate decisions as they have implications for industry regulation, monetary and trade policy, taxation, and, in more extreme cases, the possible expropriation or nationalization of private firms. Second, investigating the impact of political uncertainty on investment is a challenging task due to the potential endogeneity between uncertainty and economic growth as the economic downturn itself has arguably generated a great deal of political uncertainty. Elections around the world provide a natural experimental framework for studying political influences on corporate investment, allowing us to disentangle some of the endogeneity between economic growth and political uncertainty. If political uncertainty is high...

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