Going Extreme: The Impact of Political Polarization on Corporate Investment
By Tiecheng Leng | Posted on 11 May 2023
Post type: Paper
Using data on roll-call voting patterns of U.S. state legislators from 1993 to 2016, we find a negative relationship between firm investment and state legislative polarization, measured as the ideological distance between the Democratic and Republican party medians. An increase of one standard deviation in the average within-state polarization leads to a 4.5% reduction in firm investment rates, controlling for growth opportunities and economic conditions. In response to heightened political polarization, firms are more likely to move their corporate headquarters to less polarized states. We find that polarized states have lower passing rates for legislative bills and higher volatility in economic policy, suggesting that legislative gridlock and policy instability may be two possible mechanisms through which polarization affects firm decisions. Our paper provides new insights into the real effects of political polarization.
Co-Author(s): Julian Atanassov and Brandon Julio