Global Uncertainty and Firm Investment: Empirical Assessment

Using firm-level data from 36 countries, we estimate the effect of global uncertainty on corporate investment and financial decisions. Eleven global uncertainty measures that encompass macro, micro, and higher-order dimensions of uncertainty are employed. We find that while Economic Policy Uncertainty (EPU) measures negatively affect investment, non-EPU measures have positive effects. In 2010s, EPU and non-EPU measures exhibit notably different behaviors which appear to considerably influence our results. We also explore how firm- and country-specific characteristics affect the relationship between uncertainty and investment. The negative effects of EPU measures on investment are stronger for firms with high investment irreversibility and high leverage, but no such effect is observed from non-EPU measures. In countries with deeper credit markets, investment decisions are less sensitive to uncertainty. Regarding financial decisions, (1) increased EPU measures lead to increased cash holdings, while an increase in most other uncertainty measures reduces them and (2) except for Global EPU, most uncertainty measures are negatively associated with dividend payouts. Overall, our results reveal that contrary to a substantial body of recent scholarly work, the uncertainty-investment relation is sensitive to uncertainty measures and sample periods and different uncertainty measures have differential effects on cash holdings and dividend payouts.