Political referenda and investment: Evidence from Scotland

Abstract

We present evidence that referenda have a significant, detrimental outcome on investment. Employing an unsupervised machine learning algorithm over the period 2008-2017, we construct three important uncertainty indices underlying reports in the Scottish news media: Scottish independence (IndyRef)-related uncertainty; Brexit-related uncertainty; and Scottish policy-related uncertainty. Examining the relationship of these indices with investment on a longitudinal panel of 3,589 Scottish firms, the evidence suggests that Brexit-related uncertainty associates more strongly than IndyRef-related uncertainty to investment. Our preferred specification suggests that a one standard-deviation increase in Brexit uncertainty foreshadows a reduction in investment by 8% on average in the following year. Besides we find that the uncertainty associated with the Scottish referendum for independence while negligible at the aggregate level, relates more strongly with the investment of listed firms as well as those operating on the border with England. In addition, we present evidence of greater sensitivity to these indices among firms that are financially constrained or whose investment is to a greater degree irreversible.