Firm Boundaries and Political Uncertainty: Evidence from State Elections in India

Using subsidiary-level data for Indian firms and staggered elections across Indian states, I find that political uncertainty’s impact on firm performance varies by organizational form. I find that the gap in leverage ratio between subsidiaries of conglomerate and stand-alone firms widen by 15% in states with elections vis-á-vis other states. Periods of elevated political uncertainty is also associated with relatively lower investment and higher borrowing cost for the stand-alone firms. The results are consistent with the possibility of being driven largely by the (reduced) supply of capital than the (subdued) demand for it. This paper introduces political uncertainty as a new dimension in the long standing literature that compares diversified and single segment firms.