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Firm-level political risk and corporate R&D investment

Author

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  • Boah, Emmanuel
  • Ujah, Nacasius U.

Abstract

We examine firms’ investment decisions in research and development during political uncertainty using US firm quarterly data from 2005 through 2021. By using quarterly data, we minimize stickiness and overly generalized assumptions. The findings show that firms invest more in research and development in times of high political risk. Monetarily, the significance translates to about $10.6 million injection into research and development. The results are more pronounced for firms in competitive industries, politically sensitive firms, firms with higher growth opportunities, and firms with more liquid assets. The results are robust to the test for correlation, addressing endogeneity, and alternative proxies adopted for the variables of interest. Overall, the findings of this study support the strategic growth option theory, which suggests that firms follow a preemptive strategy in periods of high uncertainty.

Suggested Citation

  • Boah, Emmanuel & Ujah, Nacasius U., 2024. "Firm-level political risk and corporate R&D investment," Journal of Empirical Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000483
    DOI: 10.1016/j.jempfin.2024.101513
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    More about this item

    Keywords

    Firm political risk; R&D; Real option; Strategic growth theory; Uncertainty;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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