National Elections, Political Uncertainty, and Corporate Financing Activity

Project: Research

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Description

Does political uncertainty influence the ability of firms to raise external funds as well as the manner in which firms raise funds? If so, how? The goal of this proposed research is to answer these questions by examining the response of firms’ financing activities to political uncertainty surrounding national elections around the world. We focus our attention on national elections to study the effects of political uncertainty because the outcomes of such elections often have a profound impact on the future path of government economic policy. Therefore, the uncertainty related to the timing and outcome of national elections can have an important impact on corporate financing choices. Our paper contributes to a rapidly growing literature that argues that political uncertainty has real implications for corporate investment behavior (e.g. Bernanke 1983; Julio and Yook, 2012). However, we know very little about the impact of political uncertainty on the ability of firms around the world to raise debt and equity capital. Better understanding of the impact of political uncertainty on corporate financing is of great economic significance because the ability to raise needed capital is crucial for firms’ performance and investment and thus overall country economic growth.To examine the impact of political uncertainty on corporate financing, we plan to create a large data set on the capital raising activities of publicly traded firms in 48 countries in the period from 1990 to 2010. We follow Julio and Yook (2012) and use the timing of national elections as a source of exogenous variation in political uncertainty. The advantage of using an international setting is that it allows us to utilize significant cross-country and time-series variation in the timing and importance of elections as well as the capital raising activity of firms. We examine how the variations in political uncertainty brought about by national elections affects various aspects of firms' capital raising activities, including: (a) the likelihood that a firm raises external funds, b) the method of raising capital, c) the amount of raised funds, and (d) the uses of the raised funds. We also examine heterogeneity in the effect of political uncertainty on financing activities of firms within the same country. We believe that the findings of this study will provide new insights into the economic consequences of political uncertainty and therefore be useful for researchers, practitioners, investors, and policy makers.

Detail(s)

Project number9042127
Grant typeGRF
StatusFinished
Effective start/end date1/09/148/08/17