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Geopolitical risk and corporate investment efficiency

Author

Listed:
  • Nguyen, Xuan Thang
  • Nguyen, Thanh Cong
  • Hoang, Huy Viet

Abstract

Using a sample of 15,696 US firms from 1985 to 2023, this paper provides first evidence of a negative relationship between geopolitical risk and corporate investment efficiency, confirming that geopolitical risk acts as friction impeding optimal investment decisions. Delving into geopolitical risk, geopolitical threats pose greater harm to corporate investment efficiency than geopolitical acts. While heightened geopolitical risk reduces corporate overinvestment, it intensifies underinvestment. The results are consistent with the notion that heightened geopolitical risk, linked to a deteriorating macroeconomic environment, fewer investment opportunities, and higher financing costs, prompts firms to adopt conservative financial policies and forgo potential investments.

Suggested Citation

  • Nguyen, Xuan Thang & Nguyen, Thanh Cong & Hoang, Huy Viet, 2025. "Geopolitical risk and corporate investment efficiency," Finance Research Letters, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325003757
    DOI: 10.1016/j.frl.2025.107112
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    More about this item

    Keywords

    Geopolitical risk; Corporate investment efficiency; Underinvestment; Overinvestment;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing

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