Editor's Choice Policy Uncertainty and Corporate Investment

Huseyin Gulen and Mihai Ion

The Review of Financial Studies, 2016, vol. 29, issue 3, 523-564

Abstract: Using a news-based index of policy uncertainty, we document a strong negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes. More importantly, we find evidence that the relation between policy uncertainty and capital investment is not uniform in the cross-section, being significantly stronger for firms with a higher degree of investment irreversibility and for firms that are more dependent on government spending. Our results lend empirical support to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to investment irreversibility. Received January 2, 2014; accepted July 27, 2015 by Editor David Denis.

Date: 2016
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The Review of Financial Studies is currently edited by Itay Goldstein

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