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The Real Effects of Political Uncertainty: Elections and Investment Sensitivity to Stock Prices

55 Pages Posted: 8 Feb 2010 Last revised: 25 Dec 2010

Art Durnev

University of Iowa - Henry B. Tippie College of Business

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Date Written: December 22, 2010

Abstract

We show that political uncertainty surrounding elections can affect how corporate investment responds to stock prices. In a large panel of elections around the world, investment is 40% less sensitive to stock prices during election years compared to non-election years. The decrease in investment-to-price sensitivity appears to be due to stock prices becoming less informative during election years making them noisier signals for managers to follow. Further, the drop in investment-to-price sensitivity is larger when election results are less certain, in countries with higher corruption, large state ownership, and weak standards of disclosure by politicians. Finally, we show that election uncertainty leads to inefficient capital allocation, reducing company performance.

Keywords: Political Uncertainty, Elections, Information Asymmetry, Capital Allocation

JEL Classification: G15, G38, P16

Suggested Citation

Durnev, Art, The Real Effects of Political Uncertainty: Elections and Investment Sensitivity to Stock Prices (December 22, 2010). Available at SSRN: https://ssrn.com/abstract=1549714 or http://dx.doi.org/10.2139/ssrn.1549714

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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