Policy Uncertainty and Corporate Investment
Review of Financial Studies, Vol. 29 (3), 2016, 523-564
49 Pages Posted: 11 Dec 2012 Last revised: 30 May 2017
Date Written: June 24, 2015
Using the policy uncertainty index of Baker, Bloom, and Davis (2013), we document a strong negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes. More importantly, we find evidence that the relation between policy uncertainty and capital investment is not uniform in the cross section, being significantly stronger for firms with a higher degree of investment irreversibility and for firms which are more dependent on government spending. Our results lend empirical support to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to investment irreversibility.
Keywords: Political Uncertainty, Policy Uncertainty, Corporate Investment, Investment Irreversibility, Financial Constraints
JEL Classification: D80, E22, E66, G18, G31, G38
Suggested Citation: Suggested Citation