Geopolitical Uncertainty and Corporate Investment

40 Pages Posted: 15 Aug 2018 Last revised: 14 Nov 2020

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Date Written: July 29, 2018

Abstract

We find that shocks to aggregate geopolitical uncertainty are associated with an average decline in firm-level capital investment. The decline in investments increases in the degree of external financial constraints faced by firms, with the effect being stronger for more irreversible investments. A surprising and hitherto unexplored result is the role of firm-level liquidity as a necessary catalyst in linking investment plan revisions and uncertainty – without sufficient cash reserves, the negative relation between investments and uncertainty becomes insignificant.

Keywords: geopolitical risks, geopolitical uncertainty, firm investment, threats, uncertainty, financial constraints, liquidity

JEL Classification: D80, G31, H56

Suggested Citation

Dissanayake, Ruchith and Mehrotra, Vikas and Wu, Yanhui, Geopolitical Uncertainty and Corporate Investment (July 29, 2018). Available at SSRN: https://ssrn.com/abstract=3222198 or http://dx.doi.org/10.2139/ssrn.3222198

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

Yanhui Wu

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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