Geopolitical Risk, Financial Slack and Capital Investments

31 Pages Posted: 15 Aug 2018 Last revised: 13 Sep 2021

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

A central prediction of the classical real options framework is that the value of delaying investments under uncertainty increases in the degree of asset irreversibility. We confirm this using a measure of geopolitical uncertainty developed by Caldara and Iacoviello (2018) that is uncorrelated with concurrent demand. A novel finding in our study is the dependent nature of investment irreversibility and uncertainty on financial slack – without sufficient slack, firms are unable to take advantage of delaying investments when faced with uncertainty shocks. Our findings explain the paradoxical result that firms with more cash holdings cut investments to a greater degree during times of high uncertainty.

Keywords: geopolitical risks, geopolitical uncertainty, firm investment, threats, uncertainty, liquidity, cash

JEL Classification: D80, G31, H56

Suggested Citation

Dissanayake, Ruchith and Mehrotra, Vikas and Wu, Yanhui, Geopolitical Risk, Financial Slack and Capital Investments (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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