Capital Reallocation and Firm-Level Productivity Under Political Uncertainty

Abstract

Does policy uncertainty affect productivity? Policy uncertainty creates delays as firms await new information about prices, costs, and other market conditions before committing resources. Such delays can have real consequences on firms’ productivity and corporate decisions. First, we find that economic policy uncertainty has a negative impact on firm-level productivity. Second, policy uncertainty is positively related to cash holdings, but this effect is mostly driven by highly productive firms and by firms with higher levels of irreversible investments since these firms face higher opportunity costs in future states. Third, debt magnifies the adverse effects of policy uncertainty on productivity, but access to external financing during periods of significant policy uncertainty shocks has a positive impact on firm- level productivity. The three findings are robust to various specifications and provide an affirmative answer to the opening question.

Keywords: Policy Uncertainty, Capital Reallocation, TFP, Leverage, Cash, Business Cycles

JEL Classification: E22, E32, G18, G31, G32