Politics, State Ownership, and Corporate Investments

Indian School of Business WP

Review of Financial Studies, Forthcoming

80 Pages Posted: 28 Mar 2014 Last revised: 28 Sep 2019

See all articles by Shashwat Alok

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Meghana Ayyagari

George Washington University - School of Business

Date Written: January 31, 2015

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.

Keywords: Investment, Political Interference, State-Owned Enterprises, Elections, Political Economy, SOE, Corporate Investments, Politics and Finance, Political Influence

JEL Classification: G31, G38, D72, D73, P16

Suggested Citation

Alok, Shashwat and Ayyagari, Meghana, Politics, State Ownership, and Corporate Investments (January 31, 2015). Indian School of Business WP, Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2416960 or http://dx.doi.org/10.2139/ssrn.2416960

Shashwat Alok

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Meghana Ayyagari (Contact Author)

George Washington University - School of Business ( email )

Washington, DC 20052
United States

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