Geopolitical Risk, Firm Balance Sheets, and Corporate Investment: International Evidence

Posted: 15 May 2019

See all articles by Guangzhong Li

Guangzhong Li

Sun Yat-Sen Business School, Sun Yat-Sen University

Karen Lin

University of Massachusetts Lowell - Department of Accounting

Ying Zheng

Sun Yat-sen University

Date Written: April 15, 2019

Abstract

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

Suggested Citation

Li, Guangzhong and Lin, Karen and Zheng, Ying, Geopolitical Risk, Firm Balance Sheets, and Corporate Investment: International Evidence (April 15, 2019). Available at SSRN: https://ssrn.com/abstract=3381315

Guangzhong Li

Sun Yat-Sen Business School, Sun Yat-Sen University ( email )

135 Xingang Xi Road
Guangzhou, Guangdong 510275
China

Karen Lin (Contact Author)

University of Massachusetts Lowell - Department of Accounting ( email )

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Lowell, MA Enter your state here 01854
United States
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Ying Zheng

Sun Yat-sen University ( email )

Guangdong Province
China

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