Policy Uncertainty and Corporate Investment
Purdue University - Krannert School of Management
University of Arizona - Department of Finance
June 24, 2015
Using the policy uncertainty index of Baker, Bloom, and Davis (2013), we document a strong negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes. More importantly, we find evidence that the relation between policy uncertainty and capital investment is not uniform in the cross section, being significantly stronger for firms with a higher degree of investment irreversibility and for firms which are more dependent on government spending. Our results lend empirical support to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to investment irreversibility.
Number of Pages in PDF File: 49
Keywords: Political Uncertainty, Policy Uncertainty, Corporate Investment, Investment Irreversibility, Financial Constraints
JEL Classification: D80, E22, E66, G18, G31, G38
Date posted: December 11, 2012 ; Last revised: June 25, 2015
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