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The real side of black swans: Tail risk and corporate investment

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  • Yuan, Jun
  • Yang, Liuyong
  • Xu, Qi

Abstract

We investigate the real effects of tail risk on firm-level capital investment. Using an option-implied tail measure, we find that tail risk impedes investment, controlling for investment opportunities and existing uncertainty measures. This relation is stronger for firms with higher tail exposure and crash risk. The tail risk effect is more pronounced for firms with higher investment irreversiblility and demand uncertainty, consistent with the real options mechanism. Corporate resilience built by hedging activities attenuates the effect, while stressed debt financing conditions weaken the resilience and amplify the effect. Tail risk also delays investment spikes. Two instrumental variables enhance the causal interpretation. Overall, we highlight the distinctive role of tail risk in shaping real investment.

Suggested Citation

  • Yuan, Jun & Yang, Liuyong & Xu, Qi, 2025. "The real side of black swans: Tail risk and corporate investment," Journal of Banking & Finance, Elsevier, vol. 176(C).
    • Handle: RePEc:eee:jbfina:v:176:y:2025:i:c:s0378426625000883
    DOI: 10.1016/j.jbankfin.2025.107468
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    Keywords

    Corporate investment; Tail risk; Uncertainty; Investment irreversibility; Demand uncertainty; Hedging; Debt financing;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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