Politics, State Ownership, and Corporate Investment

State-owned enterprises (SOEs) form a significant part of the corporate sector in developed and developing economies. This paper shows the distortions in SOE investments due to political pressure by using the constitutionally mandated schedule of elections as a source of exogenous variation in politicians’ incentive to cater to voters. We track investments by non-financial SOEs around election years using a unique project level database of new investments announced in India and find that SOEs announce a greater number of projects during election years. These patterns are especially pronounced in politically competitive districts and districts associated with high-ranking politicians. Specifically, the number of investments announced by SOEs in election years is on average 36% (66%) greater in politically competitive districts (districts of high-ranking politicians). These projects have negative announcement returns suggesting that political influence results in projects that are likely negative NPV. These patterns are in stark contrast to those observed in a placebo set of non-government firms. Our results inform the policy debate on the efficiency differences between government and private firms and support the political view of government ownership.