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Geopolitical Risk and Investment

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  • XINJIE WANG
  • YANGRU WU
  • WEIKE XU

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.

Suggested Citation

  • Xinjie Wang & Yangru Wu & Weike Xu, 2024. "Geopolitical Risk and Investment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(8), pages 2023-2059, December.
    • Handle: RePEc:wly:jmoncb:v:56:y:2024:i:8:p:2023-2059
    DOI: 10.1111/jmcb.13110
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