Political Uncertainty and Cost Stickiness: Evidence from National Elections around the World
48 Pages Posted: 20 Apr 2015 Last revised: 16 Mar 2016
Date Written: March 15, 2016
In analyzing a large panel of elections in 56 countries for the period 1989-2012, we show that political uncertainty surrounding elections can affect asymmetric cost behaviors to activity changes (i.e., cost stickiness). The asymmetry in cost behaviors is stronger during election years than in the non-election years, even after controlling for other firm-level and country-level determinants. In another series of tests, we report strong, robust evidence supporting the predictions that the importance of political uncertainty to cost stickiness is concentrated in countries with sound political, legal, and disclosure institutions and countries having populations known to exhibit low uncertainty avoidance. The results are consistent with the view that managers retain slack resources when political uncertainty is high but to be resolved soon.
Keywords: Political Uncertainty, Cost Stickiness
JEL Classification: M41, D24
Suggested Citation: Suggested Citation