Policy Uncertainty and Corporate Investment

Using a news-based index of policy uncertainty, 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 uncertain...

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Bibliographic Details
Published in:The Review of financial studies 2016-03, Vol.29 (3), p.523-564
Main Authors: Gulen, Huseyin, Ion, Mihai
Format: Article
Language:English
Subjects:
Business entities
Capital investments
Corporate investments
Economic indices
Economic policy
Economic uncertainty
Government spending
Indexes
Investment
Investment spending
Macroeconomics
Public expenditure
Public investments
Securities regulations
Studies
Uncertainty
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Summary:Using a news-based index of policy uncertainty, 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 that 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.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhv050