Politics, State Ownership, and Corporate Investments

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.

Political uncertainty and investments by private and state‐owned enterprises

“…In sum, the results suggest that the investment behavior of SOEs is not influenced by political uncertainty, compared to that of private firms. 15 Based on the announcements made by SOEs and private firms during election years, Alok and Ayyagari (2020) conclude that incumbent governments attempt to woo voters by announcing more investments in visible projects during election years. Our results suggest that elections do not play a significant role in the actual investments made by SOEs during election or nonelection years.…”

“…Privately held firms tend to decrease investments in election years because of the political uncertainty caused by the elections. Using district‐level project data, Alok and Ayyagari (2020) do not find any significant reduction in capital investments for private firms. We control for the firm‐level characteristics (including growth opportunities and operating cash flow, in addition to economic growth) and document that private firms do reduce investments because of electoral uncertainty.…”

“…They can be under pressure to increase investments in election years rather than to decrease them. Such an increase can benefit the ruling government's vote, especially in areas with close elections, high‐ranking politicians, and left‐wing incumbents (Alok & Ayyagari, 2020).…”

“…This drop in investments is attributed to the political uncertainty hypothesis, according to which firms reduce investment expenditures until the electoral uncertainty is resolved. Alok and Ayyagari (2020) investigate investments of state-owned enterprises (SOEs) in India and find that these firms increase announcements of capital expenditure projects in election years. The reason for this increase is to woo voters who wish to see investments in, for example, infrastructure.…”

“…Using a cross-country sample, Julio and Yook (2012) show that capital expenditures decrease during years when national elections are held. Alok and Ayyagari (2020) document that SOEs announce more projects during election years to cater to voter preferences and to benefit the incumbent government. An et al (2016) note that corporate investment (at the city level) is reduced when a new mayor and/or party head is appointed.…”