Federal Spending Crowds Out Local Private Investment And Lowers Employment

Specifically, we find statistically and economically significant evidence that firms respond to government spending...by: i.) reducing investments in new capital, ii.) reducing investments in R&D, and iii.) paying out more to shareholders in the face of this reduced investment opportunity set. Further, we find that when the spending...reverse..., most all of these behaviors reverse. Finally, we also find some evidence that firms scale back their employment, and experience a decline in sales growth.

From "Do Powerful Politicians Cause Corporate Downsizing?" by Harvard Business School Professors Lauren Cohen, Joshua Coval and Christopher Malloy.

Also see Harvard Business School article, "Stimulus Surprise: Companies Retrench When Government Spends" on this research.