Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/149543
Authors: 
Riem, Marina
Year of Publication: 
2016
Series/Report no.: 
Ifo Working Paper 221
Abstract: 
I investigate how political uncertainty influences corporate investment decisions employinga unique panel dataset of German manufacturing firms. I use data on firms’ self-reportedinvestment realizations, plans and revisions. The firm-specific user cost of capital capturesthe current institutional framework, but does not reflect the uncertainty about changes ingovernment 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 stateelections occurred relative to the average investment ratio in years with no state election.Firms however seem to anticipate electoral uncertainty already when making investmentplans and hardly revise their plans. Investment revisions occur because of updatedinformation about realized sales growth and not because of resolved electoral uncertainty.I also find that electoral uncertainty negatively influences add-on investments whichface a high degree of irreversibility, while non-capacity expanding investments are notinfluenced by electoral uncertainty.
Subjects: 
Firm-level investment
user cost of capital
political uncertainty
elections
survey data
panel data
JEL: 
D22
D24
D72
D81
D92
C23
H25
H32
H73
Document Type: 
Working Paper

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