Waiting for a winner

When it comes to investing, how do corporations respond to the political uncertainty created by a coming election?


Brandon Julio has documented the tendency of firms to reduce their investment expenditures in national election years and explored why.

Given the economic turmoil — and the resultant protests — in the wake of the worldwide recession that still looms over so many nations, the actions of many corporations have come under close scrutiny. Especially in the US, where recent changes in the way election campaigns can be financed have made a huge difference in the amount of support individuals can contribute to candidates’ campaigns, questions regarding the use of corporate money to determine election outcomes are rife. Owners of some US corporations are throwing huge amounts of money into the political ring in the hope of promoting their own points of view. The question for many is whether they are also keeping their companies from investing (or promoting investment) in order to change the economic climate of the country to favour a particular candidate.

Will there be a noticeable change in the way corporations in the US act leading up to the 2012 presidential election? More, what criteria do we have upon which to base our judgement about what happens?

Baselines for measurements

In an article for the February 2012 issue of Journal of Finance, Brandon Julio, Assistant Professor of Finance at London Business School, and Youngsuk Yook, at the Graduate School of Business at Sungkyunkwan University, found that throughout the globe during election years, firms have reduced their investment expenditures by an average of 4.8 per cent from non-election year expenditures. Their article, ‘Political Uncertainty and Corporate Investment Cycles’ showed that the size of the investment cycles varies somewhat depending on several different country and election characteristics and on industry sensitivity to political views.

Their research examined 248 national elections held between 1980 and 2005 in 48 countries in which the outcome determined the national leader directly or indirectly. The primary source of election and regime change data is a database maintained by the Centre for International Development and Conflict Management at the University of Maryland, which contains annual information on the regime and authority characteristics of all independent states with total populations greater than 500,000.

A second major source of data is the World Bank Database of Political Institutions, which provides information about electoral rules and the classification of political platforms for the elected leaders and candidates. This election data was supplemented with various Internet sources for cases in which election information was missing from those databases. When it comes to firm data, the authors used information from Thomson Financial’s Worldscope database for 1980–2005; Worldscope covers companies in more than 50 developed and emerging markets, accounting for more than 96 per cent of the market value of publicly traded companies across the globe.

Many factors at play

Since election outcomes have implications for industry regulation, monetary and trade policy, taxation and, in some cases, even the possible expropriation or nationalisation of private firms, firms are bound to react to uncertainty. There are, however, many other factors at play. For example, the authors found that the temporary decline in investment expenditures in the period leading up to an election is larger in countries with civil law origin, fewer checks and balances, a less stable government and a higher ratio of central government spending to GDP. Moreover, within countries, the cycles are more pronounced when it comes to firms in industries considered more sensitive to political outcomes, such as firms in tobacco products, pharmaceuticals, health care services, defence, petroleum and natural gas, telecommunications and transportation. They also found that firms view a transition from right-to-left as potentially worse than a left-to-right transition of power.

Another aspect they measured were changes in cash holdings. In this case, they found that there were temporary increases in cash balances in the year prior to the election (4.3 per cent of the average cash to assets ratio), controlling for firm characteristics and economic conditions, which is similar to the election-year decline in investment. This suggests that the funds that would have been used as investment are temporarily held as cash until the election uncertainty is resolved. All of this leads to the conclusion that the political process affects real economic outcomes.

Political manipulation?

Professors Yook and Julio explored whether political game playing is involved in pre-election year decision-making. When it came to actions by incumbent regimes, they found no evidence of pre-electoral manipulation. They report no significant differences in growth in government spending, growth in money supply, interest rates or inflation rates in the pre-election period. The lack of a systematic relationship between these variables and the election dates suggests that election cycles in corporate investment are not due to the opportunistic behaviour of political incumbents.

When it comes to politically connected firms, those with established relationships with incumbent policymakers (which can lead to various benefits such as preferable tax treatment, government contracts and bailouts in the case of financial distress) may change their behaviour in election years to assist policymakers in their re-election hopes. However, the professors also concluded that such firms represent a fairly small fraction of all firms and do not affect the overall results.

The question for many remains, however, whether these findings will hold up in the case of the 2012 US presidential election.

Beverly Goldberg ( is a Senior Fellow in economics and business at The Century Foundation in New York and is the author of a number of business books.

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