Journal Article

Policy Uncertainty and Corporate Investment

Huseyin Gulen and Mihai Ion

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 29, issue 3, pages 523-564
Published in print March 2016 | ISSN: 0893-9454
Published online September 2015 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhv050
Policy Uncertainty and Corporate Investment

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  • Information, Knowledge, and Uncertainy
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Financial Regulation
  • Corporate Governance
  • Corporate Regulation

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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.

Received January 2, 2014; accepted July 27, 2015 by Editor David Denis.

Keywords: D80; E22; E66; G18; G31; G38

Journal Article.  17098 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Financial Regulation ; Corporate Governance ; Corporate Regulation

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