Political uncertainty and investments by private and state-owned enterprises

Abstract

We study corporate investments around national elections in India. Investment rates drop by a nonsignificant 2.2% for state-owned enterprises (SOEs) in election years. The decrease is significantly larger for private firms, which record an investment drop of 7.4%. The decrease in investment for private firms is likely attributable to political uncertainty. SOEs balance political uncertainty with the desire to woo voters who want government investments. Investments in election years are perceived positively for both private firms and for SOEs. Increased investment by SOEs and reduction in investment by private firms during election years are associated with improved investment efficiency.