The effect of regime change on entrepreneurship: A real options approach with evidence from US gubernatorial elections

Although political turnover is said to be a healthy component of the business environment, the literature is equivocal about the effects of regime change on early-stage entrepreneurial activity. I present incumbent displacement—the electoral defeat of an incumbent political party's candidate—as a source of regime change, and I analyze how this affects business formation through the lens of real options theory. I test my theory using US gubernatorial elections from 2004 to 2022, leveraging a Regression Discontinuity design to compare changes in business formation trends following elections where a challenger party candidate wins or loses by a close margin. I find that regime change reduces venture creation activity for growth-oriented ventures specifically. I also find evidence of a partial rebound in subsequent months—suggestive that some entrepreneurs delay entry while others permanently abandon their ventures.