Politics, State Ownership, and Corporate Investments

Abstract: 
Political interference has long been considered a major source of inefficiency in state-owned enterprises. However, empirical evidence regarding the impact of political influence on non-financial firms has been limited. We evaluate the influence of political factors on corporate investment decisions using a unique database of new investment projects announced in India, matched with electoral data at the district level for the period of 1995-2009. We find that state-owned enterprises (SOEs) announce a greater number of projects during election years, especially in politically competitive districts. The number of investments announced by central (state) government firms in election years is on average 36% (58%) greater in districts in which the ruling party won or lost the previous election by a narrow margin (<5%)compared to other districts. We do not observe similar investment patterns for private firms. We also find that investment announcements are greater in districts associated with high-ranking politicians and those in the home state of the ministers with jurisdiction over the SOEs. Such political manipulation is however costly since we find the politically motivated investments to be associated with negative announcement returns. Overall our results have policy implications for the effects of government ownership on real economic outcomes