Tax Breaks for Swing States? Political Bargaining, Economic Redistribution, and Firm Outcomes

71 Pages Posted: 20 Apr 2022 Last revised: 6 Dec 2023

See all articles by Sahil Raina

Sahil Raina

University of Alberta - School of Business

Sheng-Jun Xu

University of Alberta - School of Business

Date Written: April 8, 2022

Abstract

We study how firms are affected by the political bargaining power of their home regions. Exploiting shocks to the strategic importance of swing states relative to partisan states stemming from partisan gridlock in the U.S. Senate, we show that corporate valuations and investments increase in response to predicted increases in regional political bargaining power. We further verify the valuation findings using an event study based on the 2021 Georgia runoff election that produced an unexpected balancing of the Senate. Reconciling our positive investment findings with previous studies that find a negative crowding-out effect, we show that tax incentives (rather than demand spillovers) form the driving mechanism behind our findings.

Keywords: firm value, tax credits, corporate investment, political bargaining

JEL Classification: D72, G32, G38, H25

Suggested Citation

Raina, Sahil and Xu, Sheng-Jun, Tax Breaks for Swing States? Political Bargaining, Economic Redistribution, and Firm Outcomes (April 8, 2022). Available at SSRN: https://ssrn.com/abstract=4079133 or http://dx.doi.org/10.2139/ssrn.4079133

Sahil Raina (Contact Author)

University of Alberta - School of Business ( email )

2-32B Business Building
Edmonton, Alberta T6G 2R6
Canada

HOME PAGE: http://sites.ualberta.ca/~sraina/

Sheng-Jun Xu

University of Alberta - School of Business ( email )

2-32D Business Building
Edmonton, Alberta T6G 2R6
Canada

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