Geopolitical Risk and Corporate Investment
45 Pages Posted: 15 Aug 2018 Last revised: 9 May 2019
Date Written: July 29, 2018
Shocks to geopolitical risk are known to adversely affect real activity, as well as a flight to safety by invested capital. In this study we explore the channels via which this occurs. We find that firms respond to geopolitical risk by cutting back on capital investments. This effect is stronger for firms with more irreversible investments and foreign operations. Geopolitical threats appear to influence investments more than geopolitical acts do, perhaps because acts are perceived as resolving uncertainty. Dividends, another use of cash by firms, are not adversely affected by changes in geopolitical risk, indicating finite half-lives for geopolitical shocks.
Keywords: geopolitical risks, firm investment, threats, uncertainty, rare disaster probability
JEL Classification: D80, G31, H56
Suggested Citation: Suggested Citation