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The effect of political risk on investment decisions

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  • Banerjee, Pradip
  • Dutta, Shantanu

Abstract

The debate on firm’s investment decision under uncertainty is still unsettled. This study empirically examines the impact of firm-level political risk on contemporaneous capital and operating investment decisions. Using the text-based measure of firm-level political risk for US firms developed by Hassan et al. (2019), we show that when firms face higher political risk, they reduce the irreversible capital investment and deploy the surplus funds in more reversible operating activities. Our results are robust to using alternative measures of the outcome variable and to endogeneity concerns.

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  • Banerjee, Pradip & Dutta, Shantanu, 2022. "The effect of political risk on investment decisions," Economics Letters, Elsevier, vol. 212(C).
    • Handle: RePEc:eee:ecolet:v:212:y:2022:i:c:s0165176522000167
    DOI: 10.1016/j.econlet.2022.110301
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    Cited by:

    1. He, Chao & Li, Yanxi & Zhu, Jiawei, 2022. "The effect of firm-level perception of uncertainty on innovation: Evidence from China’s listed firms," Economics Letters, Elsevier, vol. 221(C).
    2. Olayinka Oyekola & Meryem Duygun & Samuel Odewunmi & Temitope Fagbemi, 2023. "Political risk and external finance: Evidence from cross-country firm-level data," Discussion Papers 2312, University of Exeter, Department of Economics.
    3. Das, Kuntal K. & Yaghoubi, Mona, 2023. "Stock liquidity and firm-level political risk," Finance Research Letters, Elsevier, vol. 51(C).
    4. Qing He & Yaqin Liu & Qian Yu & Chao Wei, 2022. "Risk Dominance Analysis of R&D Investment Cooperation in Dynamic Option Game," Sustainability, MDPI, vol. 15(1), pages 1-21, December.
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    6. Ahmad, Muhammad Farooq & Aktas, Nihat & Croci, Ettore, 2023. "Climate risk and deployment of corporate resources to working capital," Economics Letters, Elsevier, vol. 224(C).

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    More about this item

    Keywords

    Political risk; Capital investment; Working capital; Uncertainty;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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