Geopolitical Risk and Corporate Investment

45 Pages Posted: 15 Aug 2018 Last revised: 9 May 2019

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

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

Dissanayake, Ruchith and Mehrotra, Vikas and Wu, Yanhui, Geopolitical Risk 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

Register to save articles to
your library

Register

Paper statistics

Downloads
56
Abstract Views
309
rank
369,176
PlumX Metrics