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

Jun Yuan, Liuyong Yang and Qi Xu

Journal of Banking & Finance, 2025, vol. 176, issue C

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.

Keywords: Corporate investment; Tail risk; Uncertainty; Investment irreversibility; Demand uncertainty; Hedging; Debt financing (search for similar items in EconPapers)
JEL-codes: G10 G18 G31 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:176:y:2025:i:c:s0378426625000883

DOI: 10.1016/j.jbankfin.2025.107468

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