Political uncertainty, corruption, and corporate investment: evidence from India

This study uses hand-collected data to investigate the impact of state-level political uncertainty and corruption on corporate investment in India. We use a panel of 1,666 firms with 16,869 firm-year observations from 2001 to 2022. We find that the interaction between political uncertainty and corruption negatively affects firm-level investments, and that firms close to political power face greater political uncertainty. These findings are consistent across multiple robustness checks. We further validate the results by employing a Difference-in-Differences (DID) framework and using the 2018 Prevention of Corruption (Amendment) Act as a quasi-natural experiment to check investment patterns. The strong anti-corruption measures helped alleviate the negative impact of political uncertainty and corruption. Overall, the study highlights the adverse effect of state-level political uncertainty and corruption on firm-level investments.