Overview:
Durnev and colleagues at other universities studied market trends during and after election cycles and compared them with the relative stability of markets in countries with dictatorships. The research detailed how companies in democracies often change their spending and investing patterns because of uncertainty around elections. 

Method:
Researchers studied the volatility of stock markets in 50 developing and developed countries during the six months leading up to an election, and for the next year. 

Results: 
The researchers found that more mature democracies have added market volatility in the six months preceding an election, and the effect can linger for a year after an election. Autocracies tended to avoid that kind of volatility but were subject to problems during revolutions. 

Conclusion: 
Durnev found that businesses tend to cut back on investments and hiring during election cycles, but that doesn’t necessarily mean you should. Not every industry sees the same stock-market effect from uncertainty.

“They scale back just because of the uncertainties of government contracts which depend on the party elected,” Durnev said. “We looked at the level of the stock market. We were looking at how much it bounced around.The main point is this effect is not universal. It depends on the type of industry.” 

For example, companies that export oil are particularly sensitive to political changes, Durnev said. Other global companies can worry about much more than who wins the White House. “Your stock prices could depend on election results in Mexico, China and Canada,” Durnev said. ”It’s not just domestic companies that are affected.”

Iowa companies should keep in mind that the market volatility around elections have been significant, in the range of 2 to 3 percentage points, Durnev said. That could affect board and executive decisions. 

Among the other lessons from Durnev: 

• Think twice about buying companies that depend on government contracts, which can evaporate if political control changes. 
• A number of companies are starting to scale down research and development because of the volatility. The prospect of tax code changes also affects business decisions. 
• There is an “explosion” of mutual funds that now trade on the direction of market volatility.

To learn more:
Read a news release: http://bit.ly/1UnR0xM
Read the report: http://bit.ly/1X94bZr
Contact the author: artem-durnev@uiowa.edu