Political Business Cycles, Elections and Entrepreneurial Finance: A Framework

Posted: 19 Sep 2019

See all articles by Rohan Chinchwadkar

Rohan Chinchwadkar

Indian Institute of Technology Bombay

Date Written: July 2019


Political processes affect the real economy. An important channel through which politics affects economics is uncertainty. It has been observed that political uncertainty is high around national elections and negatively affects corporate investments and foreign capital inflows. If national elections affect corporations and foreign investors, we should expect them to also affect entrepreneurial finance provided by investors like venture capitalists (VCs). To add to that, in a complex federal democracy, state level politics is a significant source of political uncertainty.

This is the first paper to examine the impact of national and state elections on entrepreneurial finance and provides a framework of VC investment behavior in the face of political uncertainty. We find that VC investments decrease significantly due to political uncertainty around national and state elections. VCs respond strongly to national elections by decreasing the total investment value and the number of deals in election years. However, they give a softer response to regional political uncertainty around state elections by decreasing only the average deal size.

Keywords: political business cycles, venture capital, elections, alternative investments, political uncertainty, political economy

JEL Classification: G11, G24, P16, D72

Suggested Citation

Chinchwadkar, Rohan, Political Business Cycles, Elections and Entrepreneurial Finance: A Framework (July 2019). Available at SSRN: https://ssrn.com/abstract=3451221

Rohan Chinchwadkar (Contact Author)

Indian Institute of Technology Bombay ( email )

Maharashtra, 400076

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