2023/11/03 by XINJIE WANG, Xinjie Wang, Yangru Wu +3
Economics, Econometrics and Finance · #Market Dynamics and Volatility #Capital Investment and Risk Analysis #Climate Change Policy and Economics
paper · pdf · doi:10.1111/jmcb.13110
Abstract Using a news‐based index of geopolitical risk (GPR), we document a strong negative relationship between firm‐level corporate investment and GPR. When the GPR index doubles, next‐quarter investment declines by 14% of its sample mean. The effect is more pronounced for firms with more irreversible investment or higher market power, confirming the real options theory. However, the effect is less significant for firms with a stronger ability to substitute labor for capital, a higher labor‐to‐capital ratio, or a higher labor share, supporting the convex return theory. Overall, our results suggest that the real options channel dominates the Oi–Hartman–Abel effect.