Corporate investment decisions under political uncertainty

Arbeitspapier

I investigate how political uncertainty influences corporate investment decisions employinga unique panel dataset of German manufacturing firms. I use data on firms’ self-reportedinvestment realizations, plans and revisions. The firm-specific user cost of capital capturesthe current institutional framework, but does not reflect the uncertainty about changes ingovernment policies firms are faced with. I therefore augment the neo-classical investment model by a measure of political uncertainty resulting from the electoral process.The results show that realized investment ratios decreased by 10.5% in years when stateelections occurred relative to the average investment ratio in years with no state election.Firms however seem to anticipate electoral uncertainty already when making investmentplans and hardly revise their plans. Investment revisions occur because of updatedinformation about realized sales growth and not because of resolved electoral uncertainty.I also find that electoral uncertainty negatively influences add-on investments whichface a high degree of irreversibility, while non-capacity expanding investments are notinfluenced by electoral uncertainty.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ifo Working Paper ; No. 221

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Empirical Analysis ; Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity ; Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior ; Criteria for Decision-Making under Risk and Uncertainty ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models ; Business Taxes and Subsidies including sales and value-added (VAT) ; Fiscal Policies and Behavior of Economic Agents: Firm ; State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects
• Subject: Firm-level investment ; user cost of capital ; political uncertainty ; elections ; survey data ; panel data

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Riem, Marina
• Event: Veröffentlichung
• (who): ifo Institute - Leibniz Institute for Economic Research at the University of Munich
• (where): Munich
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/149543
• Last update: 10.03.2025, 11:44 AM CET