Geopolitical risk and corporate investment efficiency

Abstract

Using a sample of 15,696 US firms from 1985 to 2023, this paper provides first evidence of a negative relationship between geopolitical risk and corporate investment efficiency, confirming that geopolitical risk acts as friction impeding optimal investment decisions. Delving into geopolitical risk, geopolitical threats pose greater harm to corporate investment efficiency than geopolitical acts. While heightened geopolitical risk reduces corporate overinvestment, it intensifies underinvestment. The results are consistent with the notion that heightened geopolitical risk, linked to a deteriorating macroeconomic environment, fewer investment opportunities, and higher financing costs, prompts firms to adopt conservative financial policies and forgo potential investments.