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Policy Uncertainty and Corporate Investment

Review of Financial Studies, Vol. 29 (3), 2016, 523-564

49 Pages Posted: 11 Dec 2012 Last revised: 30 May 2017

Huseyin Gulen

Purdue University - Krannert School of Management

Mihai Ion

University of Arizona - Department of Finance

Date Written: June 24, 2015

Abstract

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.

Keywords: Political Uncertainty, Policy Uncertainty, Corporate Investment, Investment Irreversibility, Financial Constraints

JEL Classification: D80, E22, E66, G18, G31, G38

Suggested Citation

Gulen, Huseyin and Ion, Mihai, Policy Uncertainty and Corporate Investment (June 24, 2015). Review of Financial Studies, Vol. 29 (3), 2016, 523-564. Available at SSRN: https://ssrn.com/abstract=2188090 or http://dx.doi.org/10.2139/ssrn.2188090

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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