Political Uncertainty and Firm Investment: Project-Level Evidence from M&A Activity

Abstract

We use M&A deal-level data and gubernatorial elections in a difference-in-difference framework to ask whether political uncertainty alters investment decisions by affecting firms or projects. We find approximately 4% fewer acquirer announcements in election states and that acquirers select approximately 5% fewer targets from election states, suggesting political uncertainty affects investment through both firm and project channels. Smaller deals and deals by financially constrained firms are most susceptible through the project channel. Establishment of the project channel is important because it is evidence of the costs of political uncertainty crossing state borders, which matters for the management of these costs.

Keywords: investment, political uncertainty, gubernatorial elections, mergers and acquisitions

JEL Classification: G34, G38, H70