Capital Reallocation and Firm-Level Productivity Under Political Uncertainty

55 Pages Posted: 21 Jul 2021 Last revised: 28 Oct 2022

See all articles by Daniel Tut

Daniel Tut

Toronto Metropolitan University- Ted Rogers School of Management

Melanie Cao

York University - Schulich School of Business

Date Written: June 28, 2021

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

Suggested Citation

Tut, Daniel and Cao, Melanie, Capital Reallocation and Firm-Level Productivity Under Political Uncertainty (June 28, 2021). Available at SSRN: https://ssrn.com/abstract=3875672 or http://dx.doi.org/10.2139/ssrn.3875672

Daniel Tut (Contact Author)

Toronto Metropolitan University- Ted Rogers School of Management ( email )

55 Dundas St. W
Toronto, Ontario M5G 2C3
Canada

HOME PAGE: http://sites.google.com/view/danieltut/home

Melanie Cao

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 33801 (Phone)

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