Policy uncertainty, investment, and the cost of capital
By W. Drobetz, Sadok El Ghoul, Omrane Guedhami, Malte Janzen. Journal of Financial Stability, 2018
293 citations recorded by the source corpus.
Abstract We examine the effect of economic policy uncertainty on the relation between investment and the cost of capital. Using the news-based index developed by Baker et al. (2016) for twenty-one countries, we find that the strength of the negative relation between investment and the cost of capital decreases during times of high economic policy uncertainty. An increase in policy uncertainty reduces the sensitivity of investment to the cost of capital most for firms operating in industries that depend strongly on government subsidies and government consumption as well as in countries with high state ownership. Consistent with the price informativeness channel, we find that an increase in policy uncertainty reduces the investment-cost of capital sensitivity for firms from more opaque countries, firms with low analyst coverage, firms with no credit rating, and small firms. We conclude that economic policy uncertainty distorts the fundamental relation between investment and the cost of capital.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/4c8b6a58f265b062591cb59c874dcd04d5ef315e
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Citations in the corpus
- Economic policy uncertainty, stakeholder engagement, and environmental, social, and governance practices: The moderating effect of competition (2020, background): “…firm's annual financial variables and monthly EPU index, such as arithmetic average of EPU index values over a year (Phan et al., 2019), the natural logarithm of the arithmetic average of EPU index (Drobetz et al., 2018; Gulen & Ion, 2016), and the EPU shock (Kang et al., 2014; Vural-Yavaş, 2020).”
- The influence of economic policy uncertainty on corporate trade credit and firm value (2020, background): “Gulen and Ion (2016), Nguyen and Phan (2017), Drobetz et al. (2018), among others, suggest that policy uncertainty might have stronger effects on firms with products dependent on government spending.”