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Geopolitical risk and corporate investment in the metals and mining industry: Evidence from Australia

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  • Rumokoy, Lawren J.
  • Omura, Akihiro
  • Roca, Eduardo

Abstract

This paper examines how geopolitical risk (GPR) impacts corporate investment in the Australian metals and mining industry. We find a strong negative association between GPR and capital expenditures. Consistent with real options theory, firms are more likely to postpone investments during periods of adverse geopolitical events. The detriment of GPR is stronger on investments in ASX 200 metals and mining firms. Our findings further reveal a positive relation between GPR and stock returns, indicating the ability of investors to generate returns from the elevated market uncertainty that inflates the commodity price. The main results are robust in respect to alternative specifications and various estimation methods. In an era of increasing geopolitical tensions, competition for resources, and intense political polarization, this study provides timely insights into the dampening effect of GPR on capital investments in metals and mining companies.

Suggested Citation

  • Rumokoy, Lawren J. & Omura, Akihiro & Roca, Eduardo, 2023. "Geopolitical risk and corporate investment in the metals and mining industry: Evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000574
    DOI: 10.1016/j.pacfin.2023.101991
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    Cited by:

    1. Osama D. Sweidan, 2023. "Geopolitical Risk and Income Inequality: Evidence from the US Economy," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 169(1), pages 575-597, September.
    2. Lee, Chien-Chiang & Wang, Chih-Wei & Thinh, Bui Tien & Purnama, Muhammad Yusuf Indra, 2023. "Cash holdings and cash flows: Do oil price uncertainty and geopolitical risk matter?," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 134-152.

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    More about this item

    Keywords

    Geopolitical risk; Corporate investment; Capital expenditures; Mining; Australia;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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