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US Corporate Investment Over the Political Cycle

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  • Adam Yonce

    (US Securities and Exchange Commission, USA)

Abstract

The investment behavior of US firms exhibits systematic variation over the political cycle. After controlling for investment opportunities, US firms reduce investment expenditures approximately 2.0% during Presidential election years, 5.3% during periods of single-party government, and 8.7% during Republican presidential administrations. Neoclassical investment theory has little to say about direct links between investment and the political environment. I show that the empirical results arise naturally in a model of investment under regulatory and political uncertainty, provided that (i) regulatory policy affects the cash flows of the firm, (ii) firms have flexibility over the scale of their investments and (iii) regulatory uncertainty resolves quickly.

Suggested Citation

  • Adam Yonce, 2015. "US Corporate Investment Over the Political Cycle," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 1-37.
    • Handle: RePEc:wsi:qjfxxx:v:05:y:2015:i:01:n:s2010139215500159
    DOI: 10.1142/S2010139215500159
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    References listed on IDEAS

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    1. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," IZA Discussion Papers 2092, Institute of Labor Economics (IZA).
    2. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    3. Chen, Yu-Fu & Funke, Michael, 2003. "Option Value, Policy Uncertainty, and the Foreign Direct Investment Decision," HWWA Discussion Papers 234, Hamburg Institute of International Economics (HWWA).
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    Cited by:

    1. Thanh C. Nguyen & Vítor Castro & Justine Wood, 2022. "Political environment and financial crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 417-438, January.

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