Geopolitical Risk, Firm Balance Sheets, and Corporate Investment: International Evidence
Posted: 15 May 2019
Date Written: April 15, 2019
Using an international sample covering 17 emerging countries over the period spanning from 1995 to 2014, we examine the instrumental role of firms’ balance sheet strength in moderating the impact of geopolitical risk on corporate investment decisions. We find that geopolitical risk significantly reduces corporate investment for firms with weak balance sheet. Our results are not driven by firms with weak balance sheet having less growth opportunities, being less productive or having less internal cash flow. We also exclude the possibility that geopolitical risk affect those firms’ future growth opportunities and internal cash flow that impair their investments. Further analysis shows that the negative effect of geopolitical risk on corporate investment for firms with weak balance sheet can be attenuated by a country’s degree of financial development. Overall, our results suggest that a country could neutralize the impact of geopolitical risks on its economic growth by strengthening firms' balance sheets.
Keywords: Geopolitical Risk, Corporate Investment, Balance Sheet Strength
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