Corporate investment decisions under political uncertainty

I investigate how political uncertainty influences corporate investment decisions employing a unique panel dataset of German manufacturing firms. I use data on firms’ self-reported investment realizations, plans and revisions. The firm-specific user cost of capital captures the current institutional framework, but does not reflect the uncertainty about changes in government policies firms are faced with. I therefore augment the neo-classical investment model by a measure of political uncertainty resulting from the electoral process. The results show that realized investment ratios decreased by 10.5% in years when state elections occurred relative to the average investment ratio in years with no state election. Firms however seem to anticipate electoral uncertainty already when making investment plans and hardly revise their plans. Investment revisions occur because of updated information about realized sales growth and not because of resolved electoral uncertainty. I also find that electoral uncertainty negatively influences add-on investments which face a high degree of irreversibility, while non-capacity expanding investments are not influenced by electoral uncertainty.