Political uncertainty and stock price crash risk: Insights from state-elections in an emerging market

Exploiting staggered state elections across Indian states as exogenous political events which amplify political uncertainty, we evidence that political uncertainty increases stock price crash risk. Results, aligning with an information asymmetry channel, suggest that political uncertainty around the time of state elections induces managers to hoard bad news, fearing that uncertainty regarding election outcomes will lead to investor selling. Eventually, hoarded bad news is released, causing a stock price crash. Our findings are robust to an array of checks and addressing potential endogeneity concerns. Further, our identified positive association between political uncertainty and crash risk is more pronounced among firms that are smaller, have lower capital intensity, are leveraged, as well as headquartered in prominent states, dependent on public resources, and not politically connected.