Elections are great for democracies, but a study by a University of Iowa researcher shows they may not be so good for business.

The study, co-authored by Artem Durnev, associate professor of finance in the Tippie College of Business, finds that countries with national elections have more volatile economies because businesses don't like political uncertainty. The study also found economic volatility increases during political campaigns.

Autocracies and dictatorships, however, demonstrate no such volatility because they have less political risk, so investors are more easily able to make business decisions in those countries.

Durnev and his co-researchers looked at 50 countries, both developed and developing, and observed the volatility of each country’s stock market during the six months leading up to an election and for the year after the election. The study found that in general, more mature democracies saw increased market volatility in the six months prior to an election. The markets in autocracies did not exhibit that volatility.

This doesn't mean that autocracies face no market uncertainty, he says. People living under dictatorships often mount revolutions, destabilizing the economy by throwing out the dictator and increasing market volatility. The death of a dictator while still in office also causes increased market volatility because investors are unsure how the country's citizens will react and how new leadership will govern.

But the volatility in democracies was more frequent and clearly tied to the election, Durnev says. The study did not quantify each country's market volatility because that level depended on factors unique to each country and each election. For instance, he notes that in countries like his native Russia, where elections essentially have pre-determined outcomes, markets exhibit little volatility because most investors know what’s going to happen before election day.

The study found that markets don't necessarily settle down in the year after an election, either. Sometimes, Durnev says, the election brings political stability that leads to economic stability. But sometimes the election only creates more instability, increasing political risk and doing nothing to smooth the country's economy.

The study found that some sectors of the economy—including export-oriented industries, industries dependent on contract enforcement, and labor-intensive industries—exhibit greater levels of volatility when political risks are high. Labor-intensive industries also display higher volatility when governments from the political left lead a country or when labor laws are more strict.

Autocratic regimes, on the other hand, reduce volatility, especially in industries that are more dependent on trade or contract enforcement.

Durnev says the study sheds light on what's happening in the U.S. economy right now. Political uncertainty is high and so businesses respond by putting off expansions, investments, and new hires, slowing the economic recovery. He expects businesses to continue sitting on their cash until after the next election, when they have a clearer idea of who our new leaders will be. But even then, he says, they may hold back because the polarized nature of American politics will create ongoing uncertainty no matter who wins.

Durnev's study, "Precarious Politics and Return Volatility," was co-authored by Maria Boutchkova of the University of Leicester, Hitesh Doshi of the University of Houston, and Alexander Molchanov of Massey University. It was published in the Review of Financial Studies.