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Policy Uncertainty and Corporate Investment

Huseyin Gulen

Purdue University - Krannert School of Management

Mihai Ion

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

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Date posted: December 11, 2012 ; Last revised: June 25, 2015

Suggested Citation

Gulen, Huseyin and Ion, Mihai, Policy Uncertainty and Corporate Investment (June 24, 2015). Available at SSRN: http://ssrn.com/abstract=2188090 or http://dx.doi.org/10.2139/ssrn.2188090

Contact Information

Huseyin Gulen (Contact Author)
Purdue University - Krannert School of Management ( email )
1310 Krannert Building
West Lafayette, IN 47907-1310
United States
Mihai Ion
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
5206210737 (Phone)
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References:  38
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