Politics and Corporate Investments
60 Pages Posted: 29 May 2018 Last revised: 17 Jan 2020
Date Written: November 22, 2018
In this paper, I analyze companies' investment behavior under different local governments. For identification, I employ a Regression Discontinuity Design on close municipal elections in Germany. I find that companies that are subjected to right-wing governments significantly increase their investments by 11.71% compared to companies subjected to left-wing governments. Then, I propose and test three explanations on why previous papers did not find an effect of local politics on economic outcomes. In accordance with theory, effects are strongest in contested and populous municipalities that have a large budget. Finally, I provide cross-sectional evidence on the relationship between corporate investments and uncertainty. I substantiate previous findings by showing that firms adjust their capital stock quickly after the uncertainty of the election is resolved.
Keywords: Politics, Political Parties, Corporate Investments, Regression Discontinuity Design, Close Elections, Uncertainty
JEL Classification: H32, G31, G38
Suggested Citation: Suggested Citation