Geopolitical Uncertainty and Corporate Investment
40 Pages Posted: 15 Aug 2018 Last revised: 14 Nov 2020
Date Written: July 29, 2018
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: Suggested Citation