Geopolitical Risk and Investment

Journal of Multinational Financial Management 62 (2021) 100703
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Journal of Multinational Financial Management

journal homepage: www.elsevier.com/locate/mulfin
Does geopolitical risk matter for corporate investment? Evidence

from emerging countries in Asia
Anh-Tuan Le a, b, Thao Phuong Tran b, *
a
Department of Finance, National Central University, Taiwan, ROC
b
International School of Business, University of Economics Ho Chi Minh City, Viet Nam
A R T I C L E I N F O A B S T R A C T
JEL classifications: This paper examines the effect of geopolitical risk on corporate investment in emerging Asian
G11 countries. Using an extensive sample spanning 1995–2018, we find that geopolitical risk is
G32 negatively associated with corporate investment. Geopolitical risks in China and Russia have a
E22
greater impact on corporate investment, while a less significant influence is found in India and
D81
Turkey. Our findings are robust to using alternative measures of geopolitical risk, using alter
Keywords:
native proxies of investment, even after controlling for endogeneity concerns by a two-stage least
Geopolitical risk
square estimation, a system generalized method of moments regression, and the incremental
Corporate investment
Cash holdings effect of geopolitical risk. The adverse impact of geopolitical risk on firm investment is more
Investment irreversibility pronounced for firms with a higher degree of investment irreversibility. However, firms with
greater cash holdings can better mitigate this negative impact. Overall, this paper shows that
geopolitical risk is a crucial macrolevel shock influencing corporate investment.
1. Introduction
Geopolitical risk is the risk associated with wars, terrorist acts, and tensions between states that affect the normal and peaceful
course of international relations (Caldara and Iacoviello, 2018). This risk can have an impact on the business environment and resource
reallocation because it creates frictions in corporate policy (Demir et al., 2019). Geopolitical risk has become a reinforced global
corporate concern in the presence of the coronavirus pandemic (Aon, 2020). Scholars are increasingly interested in studying the effects
of geopolitical risk on macroeconomic and firm-level variables.1 However, the impact of geopolitical risk on corporate investment
remains largely unexplored, particularly in the context of emerging economies. In this paper, we aim to fill this gap by examining
whether and how geopolitical risk influences firms’ investment decisions in emerging Asian countries. Understanding this linkage is
strategically important because investment significantly contributes to firm growth and performance in the long run.
Our empirical investigation focuses primarily on emerging Asian countries for several reasons.2 First, geopolitical risks in these
countries have increased significantly in recent years, affecting enterprises’ willingness to invest and making them more cautious in
decision-making. According to the Global Terrorism Index, terrorist attacks in Asian countries have increased by 720 % since 2002,
* Corresponding author at: 17 Pham Ngoc Thach Street, District 3, Ho Chi Minh City, Viet Nam.
E-mail addresses: tuanlechris@g.ncu.edu.tw (A.-T. Le), thao.tran@isb.edu.vn (T.P. Tran).
1
See Park and Newaz (2018); Demir et al. (2019); Dai et al. (2020); Kotcharin and Maneenop (2020); Wang and Young (2020).
2
The data on geopolitical risk is available for 19 countries around the world, but in this paper we only employ the geopolitical index from 9 Asian
emerging countries, including China, India, Malaysia, South Korea, Thailand, Turkey, Philippines, Indonesia, and Russia. The definition of emerging
country is based on the classification provided by the International Money Fund (IMF, 2016).
https://doi.org/10.1016/j.mulfin.2021.100703
Received 6 February 2021; Received in revised form 14 June 2021; Accepted 5 July 2021
Available online 9 July 2021
1042-444X/© 2021 Elsevier B.V. All rights reserved.
A.-T. Le and T.P. Tran Journal of Multinational Financial Management 62 (2021) 100703
from 106 attacks in 2002 to 870 attacks in 2016.3 Increased geopolitical risks can hurt economic activity via two different channels.
Outflows from an economy can cause equity markets to fall and bond yields to rise, resulting in a worsening of financing conditions.
Furthermore, higher debt-servicing costs could hamper or delay investment decisions because it reduces the project returns. It is also
argued that GPR drives capital flows away from emerging countries to developed countries (Caldara and Iacoviello, 2018). Hence, it is
interesting to investigate whether corporate investment in Asian emerging markets is influenced by geopolitical risk.
Second, the majority of Asian countries are emerging economies with a high concentration of small and medium-sized businesses
(OECD, 2017). These small businesses are more vulnerable to business environment volatility because both macroeconomic and
firm-level changes have a significant impact on their policies, particularly investment (Rashid and Saeed, 2017). Geopolitical risk can
be viewed as a negative shock for small and medium-sized business investments because smaller firms frequently lack the organi
zational capability for project management to deal with the uncertainty induced by the business environment (Danneels, 2002). Third,
developing Asian countries account for 60 % of global economic growth (ADB, 2017). Meanwhile, firms in this region face high risk
from uncertain policy directions abroad, such as those of the advanced economies. Indeed, Kotcharin and Maneenop (2020)
demonstrate that GPR has a positive impact on the corporate cash decisions of Asian listed shipping companies but not on those of
other globally listed companies. This raises the question of how geopolitical risk affects corporate investment in Asia. An examination
of corporate investment in the context of geopolitical uncertainty not only fills a critical gap in the literature but also has important
implications for managers in investment and financial decision-making.
Existing studies indicate that geopolitical uncertainty hurts financial markets (Corbet et al., 2018; Park and Newaz, 2018; Bev
ilacqua et al., 2020), aggregates investor risk aversion (Wang and Young, 2020) and reduces economic real output (Lee and Lee, 2020).
At the firm level, Kotcharin and Maneenop (2020) document that firms are more likely to reserve more cash when geopolitical risk
increases in their business locations. Cash reserves may help firms prepare for unexpected events in the future, which is consistent with
the precautionary savings motive of cash. Cuculiza et al. (2020) show that analysts who are local to the places of origin of geopolitical
risk (e.g., attacks) issue earnings forecasts that are relatively more pessimistic than the consensus forecast, resulting in reduced forecast
accuracy. This would result in increased information asymmetry between firms and capital providers. To address this situation, banks
tend to limit their lending size to smaller firms to reduce risk-taking (Hu and Gong, 2019). Eventually, firms face difficulties in
accessing external credit; they lack sufficient funds for investment. In the same vein, Khoo and Cheung (2020) show that during periods
of high uncertainty, firms change their capital structure by reducing long-term debt and increasing market leverage. To cope with
uncertainty induced by geopolitical events, firms tend to “wait and see” by reducing their investment spending or delaying investment
decisions temporarily to avoid costly mistakes (Bernanke, 1983; Dixit et al., 1994). Gulen and Ion (2016) employ a sample of US data to
show that during times of high economic policy uncertainty, capital investment at both the firm and industry levels is significantly
lower because firms postpone their real options for up to eight quarters in the future until the uncertainty is resolved. Similarly, Kim
and Kung (2016) find that the primary reason for a larger reduction in investment is the use of fewer redeployable assets to respond to
uncertainty.
Employing a comprehensive sample of 96,618 firm-year observations in Asian emerging countries from 1995–2018, this paper
investigates the effect of geopolitical risk on firm investment. Using the geopolitical index using the variables developed by Caldara
and Iacoviello (2018)4, we show that geopolitical risk is negatively associated with corporate investment, which is consistent with the
explanation of real options theory. This viewpoint implies that firms are more likely to postpone investments to “wait and see” during
periods of high uncertainty caused by geopolitical events. Our findings are robust to alternative measures of geopolitical risk and
corporate investment and control for the overrepresentation of the sample. Notably, we use several advanced estimation methods to
address endogeneity concerns. Specifically, we employ firm fixed effects, which allows us to deal with time-invariant unobservable
firm-level factors. As a result, this type of model addresses bias caused by omitted variables. Second, we use a two-stage least-squares
(2SLS) regression with an instrumental variable. Following Gründler and Potrafke (2019), we use jack-knifed regional averages of the
geopolitical index as an instrument for geopolitical risk. We find consistent results that corporate investment is negatively associated
with geopolitical risk. Third, we employ a two-stage systems generalized method of moments (GMM) by Arellano and Bover (1995) to
address endogeneity issues in the spirit of using lagged variables as instruments. Finally, to isolate the effect of geopolitical risk and
economic policy uncertainty (EPU), we test the incremental impact of geopolitical risk. Specifically, we use residuals from the
regression of GPR on EPU as our main independent variable. After distinguishing the role of EPU, we find consistent results that
geopolitical risk reduces corporate investment. Again, our results are robust to these tests, demonstrating that endogeneity may not
serve in our analysis.
To determine possible mechanisms through which geopolitical uncertainty propagates in the economy, we carry out several cross-
sectional analyses to understand the role of cash holdings and investment irreversibility in linking geopolitical risk and corporate
investment. Firms that hold more cash may be able to better mitigate the negative impact of geopolitical risk on their investment. Lee
and Wang (2021) document that firms tend to hoard more cash as a precautionary measure when facing geopolitical risk. As explained
by the precautionary savings motive (Duchin et al., 2010), cash helps firms overcome the difficulties in accessing external credit and
become active in investment opportunities by reducing cash-flow volatility during periods of high uncertainty. In line with our pre
diction, we provide evidence that the effect of geopolitical uncertainty on firm investment is less pronounced for cash-rich firms.
Turning to the second set of cross-sectional variation tests, we examine the moderating role of investment irreversibility in the
3
The detailed analysis can be founded at http://visionofhumanity.org/app/uploads/2017/11/Global-Terrorism-Index-2017.pdf
4
This index is based on the number of specific words associated with geopolitical events and risks in 11 major newspapers. The details are
presented in part (3).
2
linkage between geopolitical risk and corporate investment. Our hypothesis is motivated by Bernanke (1983) and Rodrik (1991), who
argue that if a firm’s investment activity is irreversible, exogenous shocks (e.g., geopolitical risk) strengthen the motivations for firms
to delay their investment. This helps firms minimize costly mistakes by “waiting and seeing” for a better situation in the future
(Bernanke, 1983; Dixit et al., 1994). Consistently, we show that the negative impact of geopolitical risk on corporate investment should
be more severe for firms with a higher degree of investment irreversibility (fixed assets).
Our paper contributes to the literature in several crucial ways. First, it adds to the burgeoning research on the effects of geopolitical
uncertainty. Prior studies find that, at a macro level, geopolitical risks influence economic output and growth (Akadiri et al., 2019; Lee
and Lee, 2020). Other scholars have documented the link between geopolitical risk and cash holdings (Demir et al., 2019; Kotcharin
and Maneenop, 2020) and financing policy (Khoo and Cheung, 2020). We show that geopolitical risk is negatively associated with
corporate investment. To the best of our knowledge, no empirical evidence on international data has been investigated. Instead of
focusing on single-country financial data to examine this effect, we use a broader range of nine emerging Asian countries, which allows
us to obtain more comprehensive findings. Wang et al. (2019) investigate the response of corporate investment to geopolitical events.
However, these authors only use US data, while our study addresses this impact using international data of emerging countries in Asia,
which is undetermined.
In addition, prior studies document the consequences of economic policy uncertainty on firm investment (Kang et al., 2014; Wang
et al., 2014; Gulen and Ion, 2016; Chi and Li, 2017; Demir and Ersan, 2017; Liu and Zhang, 2019). However, there is no evidence of the
reason for changes in economic policy. We provide the first evidence of these relationships by showing that geopolitical risk is a
possible reason for volatile economic policy, which harms corporate investment. In addition, we explore the black box relationship
between geopolitical risk and corporate investment by performing the interaction terms between geopolitical risk and cash holding
policy. In this way, we explicitly analyze the mediating role of cash in the relationship between geopolitical risk and firm investment.
The findings of this study are valuable for managers in building optimal policies to deal with uncertainty in business operations, which
is still scarce in existing studies.
The remainder of the paper proceeds as follows. Section 2 reviews the literature on geopolitical risks and corporate investment. We
discuss the sample selection, variables and model in Section 3. Section 4 presents the results of the baseline. We further conduct cross-
sectional analyses in Section 5. Section 6 provides the robustness checks. Section 7 concludes.
2. Literature review and hypothesis development
2.1. Geopolitical risk and corporate investment
Prior studies document that geopolitical risk influences economic output and growth (Akadiri et al., 2019; Lee and Lee, 2020), stock
returns (Corbet et al., 2018; Park and Newaz, 2018; Bevilacqua et al., 2020), and commodity markets (Ramiah et al., 2019). At the firm
level, scholars document the role of geopolitical risks in decision-making, such as cash holdings (Demir et al., 2019; Kotcharin and
Maneenop, 2020), CEO compensation (Dai et al., 2020), firm performance (Tiwari et al., 2019), capital structure (Khoo and Cheung,
2020), and cash holdings (Lee and Wang, 2021). However, we know little about the relationship between geopolitical risk and
corporate investment from the current literature. In this section, we build hypotheses to understand the impact of geopolitical risk on
corporate investment.
From an investment standpoint, Akadiri et al. (2019) show that geopolitical risk has a negative impact on economic growth in both
the short and long run, resulting in a decrease in real GDP during periods of high uncertainty. Cheng and Chiu (2018) provide
consistent evidence that global geopolitical risk shocks reduce output by between 13 and 22 % in emerging economies. Furthermore,
these geopolitical uncertainties pose significant risks and volatility in investors’ returns in the financial and stock markets (Aysan et al.,
2019; Wang and Young, 2020). Indeed, Wang and Young (2020) demonstrate that geopolitical risk (e.g., terrorist attacks) is the main
driver of both negative volatility and returns in these markets, causing financial markets to suffer and investors’ preferences to shift.
The authors find that a one standard deviation increase in the monthly number of terrorist attacks results in a decrease of $75.09
million in aggregate flows to equity funds and a $56.81 million increase to government bond funds.
From a corporate policy perspective, real options theory states that during periods of high uncertainty, firms minimize costly
mistakes by deferring investment decisions or reducing their investment expenditure to “wait and see” if a better situation materializes
in the future (Bernanke, 1983; Dixit et al., 1994). Gulen and Ion (2016) find that firms delay their investments up to eight quarters,
resulting in significantly lower capital investment during this time. Additionally, to deal with political risk, firms are less likely to use
redeployable assets, which reduces their investment (Kim and Kung, 2016). Financial constraints are a possible reason to explain this
reduction. Indeed, geopolitical risks exacerbate information asymmetries between firms and lending institutions. Cuculiza et al. (2020)
show that analysts who are local to the places of origin of geopolitical risk (e.g., attacks) issue forecasts that are relatively more
pessimistic than the consensus forecast, resulting in reduced accuracy of earnings forecasts. As a result, banks in high-risk political
regions tend to limit credit growth to reduce nonperforming loans (Hu and Gong, 2019). In addition, to compensate for the increased
risk, banks raise interest rates, increasing the cost of debt for businesses (Chi and Li, 2017). Firms thus face difficulties in accessing
external financing from financial intermediaries. As a result, firms do not have sufficient funds to finance their investments.
Based on the abovementioned argument, we expect that geopolitical risks reduce firm investment for two main reasons: first, they
lead to uncertainty in the business environment, and firms may postpone their investments to wait for a more suitable time; and
second, in terms of capital expenditure, increased debt costs caused by geopolitical events may result in suboptimal investments
because of insufficient funds for investment. Taken as a whole, we propose our first hypothesis as follows:
3
Hypothesis 1. Geopolitical risk is negatively associated with corporate investment.
2.2. Moderating impact of cash holdings and investment irreversibility
From a financing perspective, geopolitical risk increases information asymmetry between firms and outside investors or lenders
(Çolak et al., 2017). To minimize losses, banks are more likely to reduce loan size and increase the interest rate to compensate for
higher risk (Chi and Li, 2017; Ashraf and Shen, 2019). As a result, it may be a challenge for firms to obtain external credits from
financial institutions and they may bear a higher cost of financing (Çolak et al., 2017; Kim, 2018). Firms are thus more likely to reduce
their spending on investment (Kang et al., 2014; Wang et al., 2014; Gulen and Ion, 2016; Rashid and Saeed, 2017). For precautionary
saving motives, cash plays a crucial role in reducing cash flow volatility in the future, which, in turn, improves corporate investment
during the high geopolitical risk period. Duchin et al. (2010) show evidence that a higher level of cash holdings would enhance the
availability of internal finance and offer more collateral to reduce external financing costs, thereby mitigating the adverse impacts of
economic shocks. Therefore, we predict that the negative effect of geopolitical risks on firm investment is less pronounced for firms
with high cash holdings. Recently, Lee and Wang (2021) show that firms tend to hold more cash to deal with geopolitical risks. The
authors further indicate that financially constrained firms hoard cash reserves as a buffer against geopolitical risk.
Interestingly, Williamson (1979) proposes the transaction cost economics arguments, which indicate that a higher degree of in
vestment irreversibility is positively correlated with higher investment vulnerability. This implies that the effect of geopolitical risk on
firm investment should vary due to the irreversibility level of investment. Indeed, Gulen and Ion (2016) find that firms delay their
investments up to eight quarters; therefore, firms that could reverse investment at a relatively low cost benefit less from waiting for the
resolution of the uncertainty than high investment irreversibility firms. The author shows robust evidence that the adverse effect of
economic policy uncertainty on corporate investment is more concentrated on firms with more irreversible investments.
Based on the predictions of the arguments mentioned above, we construct our next hypotheses as follows:
Hypothesis 2a. The negative effect of geopolitical risks on corporate investment is mitigated for firms holding more cash.
Hypothesis 2b. The negative effect of geopolitical risks on corporate investment is more pronounced for firms with a higher degree
of investment irreversibility.
3. Sample, variables and model
3.1. Sample selection
We first obtain financial data for all firms from Compustat Global. Next, we merge the Compustat data with Caldara and Iacoviello’s
(2018) geopolitical risk index, which covers nine emerging Asian countries. We exclude financial firms (SIC codes 6000–6999) and
utility industries (SIC codes 4900-4999) because their operating decisions differ significantly from those of other firms. We then drop
firm-years with negative total assets or negative capital expenditures or observations with missing values. To mitigate the influence of
outliers, we winsorize all continuous variables at the 2nd and 98th percentiles. As a result, our full sample consists of 96,618 firm-year
observations from 10,695 unique firms in nine Asian countries from 1995 to 2018.
Regarding country-level control variables, we collect the data from Baker et al. (2016), the Heritage Foundation (Foundation,
2010), the Worldwide Governance Indicators (Kaufmann et al., 2010), and the World Development Indicators.5
3.2. Variables construction
3.2.1. Dependent variable: capital expenditures

Following prior literature on corporate investment (Duchin et al., 2010; Foucault and Fresard, 2014), we use the ratio of capital
expenditures to total assets (CAPX/ASSET) to measure firm-level investment. For robustness checks, we use the natural logarithm of
capital expenditures and the ratio of capital expenditures to sales as alternative measures of corporate investment.
3.2.2. Main independent variable: geopolitical risk

The main independent variable of interest is GPR, the geopolitical risk index, developed by Caldara and Iacoviello (2018). For
international countries, GPR is a media-based proxy developed mainly using newspaper articles regarding uncertainty related to
terrorist attacks, wars, and tensions between states that influence the normal and peaceful state of international relations. Specifically,
Caldara and Iacoviello (2018) count the number of articles related to geopolitical events and risks in 11 major newspapers. A media
outlet list includes The Boston Globe, The Chicago Tribune, The Daily Telegraph, Financial Times, The Globe and Mail, The Guardian,
Los Angeles Times, The New York Times, The Times, The Wall Street Journal, and The Washington Post. The monthly index is the
number of articles related to geopolitical risk divided by the total number of articles and is then normalized to have an average value of
5
The data of business freedom is available at <http://www.heritage.org/index/>
4
100. We use the average geopolitical index of 12 months of a fiscal year to measure geopolitical risk. A higher value of GPR denotes
higher geopolitical risk. 6
3.2.3. Control variables

Regarding control variables, we include a set of firm-level and country-level characteristics, which may affect corporate invest
ment, as suggested in the literature (Almeida and Campello, 2007; Duchin et al., 2010; An et al., 2016; Dessaint et al., 2018). SIZE is the
natural logarithm of total assets in millions of US dollars. AGE is the natural logarithm of the number of years since incorporation.
SALES GROWTH is the percentage change in sales. LEV captures the leverage ratio as the sum of debt in current liabilities and total
long-term debt, divided by total assets. OANCF is the ratio of cash flow in operation to total assets. ROE is the return on equity.
SD4_ROA measures the volatility in profit gauged by a four-year rolling window standard deviation of return on assets.
In addition, different macroeconomic shocks and conditions across countries may affect a firm’s investment. Because institutional
development contributes directly to firm decisions and performance (Nguyen et al., 2015; Tunyi et al., 2019), we include several
variables to capture national governance quality. First, RULE OF LAW is the rule of law index, which varies from − 2.5 to +2.5. A value
of 2.5 implies the best national governance quality. We also include INVESTMENT FREEDOM, an investment freedom index, which
ranges between 0 and 100, with 100 indicating the freest investment environment. In addition, we include GDP GROWTH, which is the
growth rate of gross domestic product and is also included to control for factors related to each country’s economy. INFLATION is
gauged by the annual inflation rate (GDP deflator).
3.3. Model
To investigate the impact of geopolitical risk on corporate investment, we construct the model specification as follows:
CAPX/ASSETi,j,t = β1GPRj,t + δ’Firm controli,j,t + η’Country controlj,t + Industry Fixed Effects + Country Fixed Effects + Year Fixed Effects + εi,
j,t (1)
where CAPX/ASSETi,j,t is capital expenditures, scaled by total assets for firm i in country j at time t. GPRj,t is the geopolitical index of
Caldara and Iacoviello (2018) for country j in year t. Firm controls are a vector of firm characteristics, including SIZE, AGE, SALES
GROWTH, LEV, OANCF, ROE, and SD4_ROA. Country Controls is a set of country-level controls, including RULE OF LAW, INVESTMENT
FREEDOM, GDP GROWTH, INFLATION. These control variables are carefully defined in Section 3.2.3. Finally, year, industry and country
fixed effects are included in all specifications to capture characteristics that are invariant within the year, industry and country. We
classify industries by 2-digit SIC codes. The standard errors are heteroscedasticity robust and clustered at the country level. Note that
β1 in Eq. (1) captures the impact of geopolitical risk (GPR) on corporate investment. If geopolitical risk harms corporate investment,
one would expect β1 to be negative and significant.
4. Empirical results
4.1. Descriptive statistics
Table 1 presents the sample distributions by country, year and industry. As shown in Panel A, China and India contribute to the
largest number of observations in our sample, with 19,314 and 18,032 firm-years, respectively. Three countries accounting for the
smallest observations are the Philippines (5,843 firm-years), Indonesia (4,133 firm-years) and Russia (3,825 firm-years). South Korea
exhibits the highest uncertainty related to geopolitical events. The mean GPR for this country is 117.80 for the period, while Indonesia
has the lowest geopolitical risk, corresponding to a mean of only 74.23.
Panels B and C present the sample distribution by year and industry, respectively. The number of observations increases yearly from
1995 to 2018. Most firms in our sample are in manufacturing sectors because our sample covers Asian emerging countries where
manufacturing firms account for a large proportion of businesses.
Table 2 provides descriptive statistics of all variables in our baseline regression. The capital expenditure ratio, on average, is 5.381
% per year, accompanying the standard deviation of 6.011 %. The maximum value of CAPX/ASSET is 77.12 %. The SIZE mean is
approximately 8.613, while the mean and standard deviation of AGE are 1.932 and 0.862, respectively. Overall, the annual sales
growth of firms in our sample is approximately 12.9 %, and they use a leverage ratio of 23.9 % per year. In terms of operating per
formance, return on equity is approximately 4.7 % per year on average. Regarding country-level variables, the mean INVESTMENT
FREEDOM reached 40.79 out of 100, with a median of 37.77. This sample also shows that the mean value of the annual GDP GROWTH
rate is 6.5 %, while the countries’ average inflation (INFLATION) reaches 4.4 % per year.
Table 3 shows pairwise correlation values between independent variables in our model. The correlation between GPR and CAPX/
ASSET is negative and statistically significant at the 1% level. These results preliminarily show evidence that corporate investment is
negatively related to geopolitical uncertainty. Notably, we observe that the correlation coefficients between independent variables are
6
In the robustness check, we use political risk from ICRG, December’s GPR index, the log-changes in GPR, and yearly changes in the GPR index as
alternative measures of geopolitical risk. Note that our results also remain unchanged when using the natural logarithm of geopolitical risk index to
reduce outliers and skewness of the data. The unreported data is available from the authors upon request.
5
Table 1
Sample description.
Panel A. Country-level variables
Country Obs. % GPR EPU RULE OF LAW INVESTMENT FREEDOM GDP GROWTH INFLATION
China 19,314 19.99 105.2 175.5 − 0.422 26.82 0.086 0.037

India 18,032 18.66 76.10 99.63 − 0.001 37.54 0.069 0.057
Malaysia 14,171 14.67 95.29 N/A 0.459 48.98 0.058 0.035
South Korea 13,511 13.98 117.8 138.5 0.985 69.34 0.062 0.032
Thailand 11,623 12.03 98.84 N/A 0.009 47.58 0.036 0.026
Turkey 6,166 6.382 110.7 N/A − 0.053 66.95 0.047 0.092
Philippines 5,843 6.048 98.20 N/A − 0.412 47.12 0.039 0.071
Indonesia 4,133 4.278 74.23 N/A − 0.582 37.53 0.048 0.101
Russia 3,825 3.959 103.6 127.1 − 0.832 38.12 0.016 0.084
Panel B. Sample distribution by year
Year N Year N Year N Year N
1995 394 2001 1,650 2007 4,201 2013 6,357

1996 610 2002 2,673 2008 3,985 2014 6,831
1997 870 2003 2,988 2009 4,100 2015 7,055
1998 1,149 2004 3,102 2010 4,754 2016 7,836
1999 1,241 2005 3,755 2011 5,178 2017 8,075
2000 1,415 2006 3,925 2012 5,875 2018 8,599
Panel C. Sample distribution by industry
Industry 2-digit SIC N Industry 2-digit SIC N
Agriculture 01-09 2,344 Transportation 40-48 12,101

Mineral industries 10-14 2,512 Wholesale trade 50-51 22,985
Construction 15-17 6,177 Retail trade 52-59 1,499
Manufacturing 20-39 39,450 Service >=70 9,550
This table shows the sample distributions by country in Panel A, by year in Panel B and by industry in Panel C. The definitions of the variables are
provided in the Appendix.
Table 2
Summary statistics.
Variables Mean St.Dev Min Median Max
CAPX/ASSET (%) 5.381 6.011 0.016 3.458 77.12

GPR 99.23 23.01 46.69 91.25 172.1
EPU 141.9 79.25 49.48 128.2 386.4
SIZE 8.613 2.665 3.797 8.101 15.48
AGE 1.932 0.862 0.000 2.079 3.258
SALES GROWTH 0.129 0.355 − 0.622 0.088 1.542
LEV 0.239 0.195 0.000 0.219 0.770
OANCF 0.054 0.084 − 0.176 0.052 0.271
ROE 0.047 0.230 0.040 0.046 0.565
SD4_ROA 0.043 0.060 0.002 0.025 0.296
RULE OF LAW 0.042 0.510 − 0.719 − 0.047 1.237
INVESTMENT FREEDOM 40.79 14.86 20.00 37.77 70.00
GDP GROWTH 0.065 0.030 − 0.131 0.068 0.145
INFLATION 0.044 0.040 − 0.016 0.037 0.164
This table shows the descriptive statistics of 96,618 firm-year observations from Asian emerging countries over the 1995–2018 period. The definitions
of the variables are provided in the Appendix.
quite low, combined with the value of the variance inflation factor (VIF), which is approximately 1.51 (untabulated in the table) for the
main regression. Hence, perfect multicollinearity is not a severe issue in our model.
4.2. Baseline results
Table 4 reports the regression results for the principal analysis as specified in Eq. (1). We use various combinations of controls.
Specifically, we call Column (1) our naïve model because we do not include firm characteristics or macroeconomic variables, but we do
control for industry, cross-section, and time fixed effects. Column (2) and Column (3) only account for firm and country characteristics,
respectively. In Column (4), we include both the firm characteristics and macroeconomic variables. A set of industry, country, and time
fixed effects are included in Columns (2) - (4). In terms of the goodness-of-fit, the adjusted R-squared is highest in Column (4), implying
the importance of controlling heterogeneity in both firm characteristics and macroeconomic conditions.
The results from Table 4 show that the coefficients on GPR are negative and highly significant at 1% for all model specifications.
6
A.-T. Le and T.P. Tran
Table 3
Pairwise correlations.
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
(1) CAPX/ASSET 1.00

(2) GPR − 0.07*** 1.00
(3) EPU − 0.07*** 0.67*** 1.00
(4) SIZE 0.05*** 0.11*** 0.03*** 1.00
(5) AGE − 0.17*** 0.08*** 0.08*** 0.24*** 1.00
(6) SALES GROWTH 0.11*** − 0.02*** 0.02*** 0.02*** − 0.10*** 1.00
(7) LEV 0.02*** − 0.09*** − 0.16*** 0.18*** 0.04*** − 0.02*** 1.00
7
(8) OANCF 0.20*** − 0.04*** − 0.07*** 0.04*** 0.03*** 0.03*** − 0.06*** 1.00
(9) ROE 0.10*** − 0.05*** − 0.03*** 0.03*** − 0.01*** 0.16*** − 0.11*** 0.26*** 1.00
(10) SD4_ROA − 0.07*** 0.02*** − 0.03*** − 0.08*** 0.08*** − 0.05*** 0.08*** − 0.11*** − 0.14*** 1.00
(11) RULE OF LAW − 0.06*** 0.21*** − 0.06*** 0.24*** 0.17*** − 0.07*** 0.04*** − 0.02*** − 0.07*** 0.09*** 1.00
(12) INVESTMENT FREEDOM − 0.02*** 0.25*** − 0.23*** 0.39*** 0.16*** − 0.06*** 0.10*** 0.00 − 0.07*** 0.10*** 0.48*** 1.00
(13) GDP GROWTH 0.07*** − 0.20*** − 0.26*** − 0.08*** − 0.18*** 0.10*** − 0.03*** − 0.02*** 0.06*** − 0.10*** − 0.36*** − 0.35*** 1.00

(14) INFLATION 0.09*** − 0.20*** − 0.13*** 0.11*** − 0.08*** 0.09*** 0.12*** 0.02*** 0.02*** 0.03*** − 0.12*** 0.09*** − 0.00 1.00
This table provides the correlation coefficient matrix of the main independent variables. The sample includes 96,618 firm-year observations from Asian countries over the 1995–2018 period. The
definitions of the variables are provided in the Appendix. *** denotes statistical significance at the 1% level.
Table 4
Geopolitical risk and corporate investment.
Dependent variable: CAPX/ASSET
(1) (2) (3) (4)
GPR − 0.007*** − 0.003*** − 0.003*** − 0.002***

(-3.751) (-3.609) (-3.376) (-3.844)
SIZE 0.186** 0.180**
(2.476) (2.592)
AGE − 1.212*** − 1.191***
(-8.743) (-8.837)
SALES GROWTH 1.169*** 1.152***
(4.638) (4.497)
LEV 0.813** 0.789**
(1.986) (2.062)
OANCF 13.331*** 13.309***
(23.544) (24.261)
ROE 0.746*** 0.729**
(2.729) (2.645)
SD4_ROA − 1.530* − 1.419**
(-1.936) (-1.987)
RULE OF LAW − 0.523 − 0.292
(-1.033) (-0.854)
INVESTMENT FREEDOM 0.003 0.004
(0.144) (0.288)
GDP GROWTH 3.880 − 0.844
(0.627) (-0.196)
INFLATION 5.082 0.477
(1.673) (0.290)
CONSTANT 8.145*** 7.461*** 7.478*** 7.400***
(21.277) (10.575) (4.514) (6.761)
Industry fixed effects YES YES YES YES
Country fixed effects YES YES YES YES
Year fixed effects YES YES YES YES
Adjusted R2 0.022 0.101 0.027 0.101
Observations 96,618 96,618 96,618 96,618
This table shows the results for testing the effect of geopolitical risk on corporate investment. CAPX/ASSET is the dependent variable for all speci
fications. The definitions of the variables are provided in the Appendix. Industry, country and year fixed effects are included in the models. The
coefficient estimates and t-statistics are reported based on robust standard errors clustered by country. *, ** and *** denote statistical significance at
the 10 %, 5 % and 1 % levels, respectively.
This lends strong support to the argument that geopolitical risk harms corporate investments in Asian emerging countries. The co
efficients vary from -0.002 to -0.007 and are economically significant. As suggested in Column (4), the coefficient on GPR is -0.002,
explaining that a one-standard-deviation increase in GPR is associated with a decrease of 0.86 % in corporate investment.7 The results
support Hypothesis 1, indicating that geopolitical risk is negatively associated with corporate investment.
Although the control variables are not our primary interest, we also briefly report the sign and significance. We find that larger
firms appear to invest more, consistent with González (2020). In contrast, there is a negative association between firm age and in
vestment, indicating that older firms are more likely to reduce investment activities. In addition, we show that firms with a higher sales
growth, a higher leverage ratio, a higher cash flow, or a higher return exhibit higher capital expenditures, as the findings of An et al.
(2016); Duchin et al. (2010). Additionally, firms with high profit volatility tend to reduce their investment. Although we take into
consideration the role of country-level variables such as the rule of law, investment environment, and macroeconomic condition, we
find mixed results in terms of coefficient signs. The effect of these variables on firm investment thus is not confirmed in the scope of this
study.
4.3. Endogeneity
Our model may face endogeneity problems, which may affect both geopolitical risks and corporate investment. We address this
concern in several ways: (1) using a firm fixed effect model; (2) using a 2SLS estimation; (3) conducting a system GMM estimation; and
(4) estimating the incremental effect of geopolitical risk. First, we carry out the analysis using the firm and year fixed effects model. We
take advantage of the fixed effects model to stress time-invariant unobservable firm-level factors, which help us deal with bias induced
by the omitted variables. We present the results in Table 5, in which Column (1) presents the regression results using firm fixed effects.
Consistently, the coefficient on GPR is -0.012 and highly significant (t-statistic = -3.042), indicating that firms reduce their investment
7
The marginal effect is obtained as follows: 0.86% = (0.002*23.01)/5.381, where the denominator is the mean of corporate investment (CAPX/
ASSET).
8
Table 5
Endogeneity.
Firm fixed effects 2SLS Systems GMM Incremental effect
CAPX/ASSET GPR CAPX/ASSET CAPX/ASSET CAPX/ASSET

(1) (2) (3) (4) (5)
GPR − 0.012*** − 0.001**

(-3.042) (-2.418)
PREDICTED GPR − 0.122***
(-4.975)
INCREMENTAL GPR − 0.011***
(-2.749)
REGIONAL GPR 0.384***
(4.300)
SIZE 0.404*** 0.320 0.397*** 0.092*** 0.235**
(4.469) (1.274) (5.250) (11.025) (2.551)
AGE − 1.704*** − 0.306 − 1.323*** − 0.152*** − 1.261***
(-3.679) (-0.450) (-9.621) (-3.319) (-6.822)
SALES GROWTH 0.665*** 0.227 1.163*** 0.281*** 1.098**
(7.945) (0.517) (4.119) (4.181) (3.154)
LEV − 5.846*** − 2.563 0.135 − 2.455*** 1.129**
(-6.257) (-1.069) (0.315) (-6.053) (2.463)
OANCF 4.416*** 0.588 13.004*** 5.826*** 13.490***
(5.283) (0.242) (21.886) (9.757) (19.680)
ROE 0.980*** − 0.508 0.492* 0.483*** 0.897**
(4.696) (-0.952) (1.801) (4.865) (2.437)
SD4_ROA − 0.269 8.288* 0.278 − 0.125 − 1.674***
(-0.651) (1.845) (0.395) (-0.383) (-2.910)
RULE OF LAW − 0.042 13.167 1.856* − 0.118* 0.546
(-0.239) (0.557) (1.839) (-1.799) (1.580)
INVESTMENT FREEDOM 0.015*** 0.125 0.042** 0.004* − 0.040***
(3.219) (0.486) (2.018) (1.755) (-3.992)
GDP GROWTH 2.051*** − 203.151** − 1.652*** 2.764*** − 17.529***
(2.822) (-2.336) (-2.988) (3.415) (-3.711)
INFLATION 5.473*** − 22.355 − 0.279 1.184* − 5.022**
(9.114) (-0.535) (-0.130) (1.671) (-2.052)
CAPX/ASSETt-1 0.641***
(4.339)
CONSTANT 6.399*** 86.595*** 18.111*** 1.730*** 10.075***
(7.616) (4.527) (6.773) (4.641) (9.902)
Industry fixed effects NO YES YES YES YES
Country fixed effects NO YES YES YES YES
Year fixed effects YES YES YES YES YES
Adjusted R2 0.082 0.412 0.102 0.113
Observations 96,618 96,618 96,618 83,152 54,682
F test for weak instrument 272.10
Underidentification tests (Anderson-LM statistic) 248.73***
p-value for AR(2) Test 0.125
p-value for Hansen Test 0.417
This table shows regression results for testing to address endogeneity concerns. We use firm-fixed model in Column (1). In columns (2) – (3), we use
2SLS with instrumental variables. Specifically, we regress GPR on the instruments, all of the control variables, and all fixed effects. Column (3) reports
the results of the second-stage regression, which uses the PREDICTED GPR estimates from the first-stage regression. In column (4), we use systems
GMM. In column (5), we estimate the incremental effect of GPR. INCREMENTAL GPR is residuals from the regression of geopolitical risk on economic
policy uncertainty. The definitions of the variables are provided in the Appendix. Industry, country and year fixed effects are included in models (2) –
(5). The coefficient estimates and t-statistics are reported based on robust standard errors clustered by country. *, ** and *** denote statistical
significance at the 10 %, 5 % and 1 % levels, respectively.
in response to geopolitical uncertainty.

More interestingly, in the spirit of Gründler and Krieger (2016), we employ two-stage least squares (2SLS) regression with
instrumental variables for endogenous regressors of interest (GPRs) to cope with endogeneity problems due to reverse causality.
Gründler and Potrafke (2019) indicate that political uncertainty (e.g., corruption) in a country is more likely to follow its neighbors. In
other words, a country’s geopolitical risk exhibits a positive correlation with that of other countries in a particular region. Following
Gründler and Potrafke (2019), we use jack-knifed regional averages of the geopolitical index as an instrument for geopolitical risks. We
named this instrument REGIONAL GPR. Column (2) of Table 5 shows the first-stage regression results of the 2SLS estimation.
Empirically, we regress geopolitical risk (GPR) on the instrumental variable (REGIONAL GPR) and all country-level covariates as in Eq.
(1). Accurately, the coefficient on REGIONAL GPR is positive and significant at the 1% level, strongly supporting our conjecture that
geopolitical risk in a country tends to be positively related to geopolitical risk in neighboring countries. Notably, the last two rows of
this column show that the F-statistic of Cragg and Donald (1993) is 272.10, rejecting the hypothesis that our instrument is weak.
Turning to the second stage, we regress CAPX/ASSET against fitted values of the first stage (PREDICTED GPR) and all control variables.
9
We obtain consistent findings with the previous results in Table 4. The coefficient on PREDICTED GPR is again negative and significant
at the conventional level. The results lend further support for our main finding regarding the negative association between geopolitical
risk and corporate investment.
Third, we use GMM estimation, which may benefit us in dealing with endogeneity concerns by addressing unobserved hetero
geneity and simultaneity. Specifically, we include the lagged dependent variables in a model and use lagged independent variables as
instruments. In a similar approach to Roodman (2009), we limit the lag of instruments to three to reduce the instrumental weakness of
the model. Following Arellano and Bover (1995), we use the Hansen J test to ensure the validity of the instruments and the AR(2) test to
check the absence of second-order autocorrection in the residuals.
The estimation results of this test are reported in Column (4) of Table 5. As expected, the coefficient on GPR is negative (-0.001) and
highly significant (t-statistics=-2.418), suggesting that geopolitical risks are still negatively related with corporate investment.
Moreover, the p-values of the Hansen test and AR (2) test are higher than the critical value of 0.1 in both tests. These values strongly
suggest that there is no autocorrelation and that using the instrument set in our model is valuable. The number of observations in GMM
estimation decreases because we employ the lagged independent variables as instruments.
Finally, empirical studies have spent great effort explaining the role of economic policy uncertainty in shaping firm investment
(Gulen and Ion, 2016; Liu and Zhang, 2019; Xu, 2020). To isolate the effect of economic policy uncertainty and geopolitical risk, we
conduct an incremental effect analysis of geopolitical risk, because geopolitical risk (GPR) and economic policy uncertainty (EPU) are
highly correlated. As shown in Table 3, the correlation between EPU and GPR is 0.67. This would lead to the impossibility of including
both variables in the same regression due to multicollinearity. To cope with this problem, we follow Lee and Wang (2021) to test the
incremental effect of geopolitical risk on corporate investment. Specifically, we run the following equation:
GPRj,t = α+βEPUj,t +εj,t (2)
where GPR is the geopolitical risk index and EPU is the economic policy uncertainty index proposed by Baker et al. (2016). We take
residuals of Eq. (2), which is the difference between the actual and predicted geopolitical risk. These residuals capture factors that are
explained by GPR but not explained by EPU in the analysis. It is an incremental effect, namely, INCREMENTAL GPR. We then regress
corporate investment on this incremental effect. Column (5) of Table 5 reports the regression results. We observe that the coefficient on
Table 6
Geopolitical risk influence across countries.
China India Malaysia South Korea Thailand Turkey Philippines Indonesia Russia
(1) (2) (3) (4) (5) (6) (7) (8) (9)
GPR − 0.025*** − 0.001** − 0.005** − 0.007*** − 0.011* − 0.001** − 0.004* − 0.007* − 0.023**
(-4.282) (-2.563) (-2.557) (-4.006) (-1.893) (-2.041) (-1.861) (-1.930) (-2.337)
SIZE 0.457*** 0.503*** 0.442*** 0.284*** 0.344*** 0.595*** 0.121*** 0.198*** 0.208**
(8.374) (10.363) (6.717) (4.248) (3.415) (2.674) (2.737) (3.676) (1.994)
AGE − 1.762*** − 1.263*** − 1.248*** − 0.926*** − 1.049*** − 0.143** − 0.866** − 0.994*** − 0.001***
(-25.974) (-13.178) (-10.809) (-8.680) (-6.203) (-2.484) (-2.555) (-5.481) (-3.002)
SALES GROWTH 0.648*** 1.873*** 0.740*** 0.650*** 0.891*** 0.940 1.003** 1.708*** 0.735
(6.150) (10.138) (6.365) (4.150) (3.246) (1.073) (2.362) (3.896) (0.901)
LEV 0.684** 0.015 − 0.909** 1.669*** − 1.769*** 3.415 1.815 − 1.815*** − 0.753
(1.961) (0.046) (-2.427) (3.829) (-3.278) (1.055) (1.216) (-2.961) (-0.501)
OANCF 9.715*** 12.942*** 9.254*** 10.764*** 8.156*** 8.199** 13.285*** 10.358*** 12.952***
(16.869) (17.863) (10.010) (12.938) (8.089) (2.483) (5.688) (6.624) (3.937)
ROE 1.136*** 1.264*** 0.432* 0.443** 0.686** 1.315** 0.084 − 0.086 1.330
(6.371) (7.065) (1.835) (2.347) (2.199) (2.353) (0.113) (-0.219) (1.282)
SD4_ROA − 2.523*** − 1.949* 0.683 − 2.410*** 0.463 17.968 1.983 − 2.848* 5.293
(-2.648) (-1.952) (0.952) (-3.040) (0.261) (1.606) (0.880) (-1.920) (0.991)
RULE OF LAW − 75.083*** − 61.697 − 2.089 − 8.213*** 5.307 5.656 5.908 13.577 126.900
(-3.728) (-0.463) (-1.497) (-3.840) (0.907) (1.344) (0.785) (1.319) (1.470)
INVESTMENT FREEDOM 0.083*** 1.454 0.048* 1.221*** 0.040 0.042 − 0.862*** 0.106 − 2.694
(3.286) (0.526) (1.731) (3.850) (0.710) (0.212) (-3.581) (1.452) (-1.343)
GDP GROWTH − 8.895*** 4.866 0.457*** 0.504*** 0.092 0.069 0.474 0.641 9.944
(-3.195) (0.561) (2.885) (4.609) (0.284) (0.679) (1.161) (0.641) (1.491)
INFLATION 17.722*** 14.305 − 20.812* 71.537*** − 19.181 8.756*** − 13.821 47.389*** − 33.098
(3.488) (0.515) (-1.650) (4.385) (-0.427) (5.469) (-0.837) (2.654) (-1.343)
CONSTANT 21.573*** − 13.327 0.654 − 96.478*** 1.290 0.492 59.798*** − 6.282 − 30.253
(2.584) (-0.543) (0.425) (-3.793) (0.476) (0.039) (5.119) (-1.462) (-1.334)
Industry fixed effects YES YES YES YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES YES YES YES
Adjusted R2 0.165 0.164 0.165 0.160 0.159 0.130 0.261 0.167 0.296
Observations 19,314 18,032 14,171 13,511 11,623 6,166 5,843 4,133 3,825
This table shows the results of testing the effect of geopolitical risk on firm investment using subsamples of Asian countries. CAPX/ASSET is the
dependent variable for all specifications. The definitions of the variables are provided in the Appendix. Industry and year fixed effects are included in
the models. The coefficient estimates and t-statistics are reported based on robust standard errors clustered by country. *, ** and *** denote statistical
10
INCREMENTAL GPR loads negatively and significantly at the 1% level, indicating that geopolitical risk negatively affects corporate
investment after eliminating the impact of economic policy uncertainty. In summary, the baseline results remain unchanged when we
carry out advanced different regression methods to estimate the equations. This implies that endogeneity caveats are not a consid
erable issue in this study.
4.4. Geopolitical risk influence across countries
We further consider the impact of geopolitical risk on corporate investment in different countries. Given the cross-country sample’s
ability to show the effects of geopolitical risk on the region, it is also worth investigating whether and how this impact differs by
country. To do this, we reestimate Eq. (1) using subsamples of nine countries. We also include all control variables and industry and
year fixed effects, as shown in Table 4. The results are reported in Table 6. Overall, we observe that the coefficients on GPR are negative
and significant at the conventional level in all the Asian countries. Notably, geopolitical risk in China and Russia has a greater impact
on corporate investment. The coefficient on GPR for the Chinese subsample is -0.025 and highly significant. One possible reason to
explain this effect is that GPR in China is significantly affected by the China-United States trade war, which has resulted in an unstable
business and political environment and altered relations between these two countries (Lu, 2018). Firms in China bear not only
geopolitical shocks from China but also the spillover of US-based shocks. Thus, the sensitivity of corporate investment in response to
GPR should be more pronounced for Chinese firms. In addition, firms in Russia exhibit the greatest risk exposure to GPR, with sig
nificant causality observed from GPR indices to corporate investment. These findings are consistent with Balcilar et al. (2018), who
show that China and Russia are the most vulnerable countries to GPR shocks. Meanwhile, India is found to be the BRICS nation most
resilient to GPR shocks.8 Consistently, we also find that the corporate investment of firms in Turkey and India is less influenced by GPR
among emerging Asian economies. In sum, although geopolitical risk negatively affects corporate investment in all countries in our
sample, the degree of this impact is heterogeneous across countries.
5. Cross-sectional analysis
5.1. The role of cash holdings
In this section, we understand the economic channels underlying the relation between geopolitical risk and corporate investment.
Our findings suggest that geopolitical risks lead to difficulties in accessing external capital and strengthen financial constraints for
firms, which in turn reduce corporate investment. In a seminal work, Denis and Sibilkov (2010) show that cash is more valuable to
financially constrained firms because it may benefit firms by improving investments and the value of investments. To address uncertain
events, we posit that firms with greater cash holdings for a precautionary motive (Opler et al., 1999; Bates et al., 2009) can better
mitigate the negative effect of geopolitical risks on corporate investment. This line of argument posits that the effect of geopolitical
uncertainty on firm investment should be less pronounced for cash-rich firms. To test this hypothesis, we run our model specification as
follows:
CAPX/ASSETi,j,t = β1GPRj,t + β2HIGH CASHi,j,t + β3GPRj,t × HIGH CASHi,j,t + δ’Firm controli,j,t + η’Country controlj,t + Industry Fixed Effects
+ Country Fixed Effects + Year Fixed Effects + εi,j,t (3)
where HIGH CASH is an indicator variable that takes the value one if a firm’s ratio of cash and equivalents to total assets is higher than
the median sample in a given year and zero otherwise. We also include the same set of control variables and analysis strategies as in Eq.
(1). Note that the coefficients on GPR × HIGH CASH capture the difference in the effect of geopolitical risk on firm investment between
firms with high and low cash holdings. If high cash holding firms perform better in mitigating the adverse effect of geopolitical risks
than low cash holding firms, the coefficient of the interaction term β3 would also be predicted to be positive and statistically significant.
As shown in Column (1) of Table 7, the coefficient on GPR × HIGH CASH is positive and statistically significant at the 1% level,
indicating that the negative relation between geopolitical risk and corporate investment is less pronounced for firms with high cash
holdings. Collectively, the results from this test support our hypothesis regarding the precautionary saving motives of cash holdings for
corporate investment, consistent with the findings in existing studies (Wang et al., 2014; Li, 2019; Liu and Zhang, 2019). Firms may
benefit from using cash for investment to prevent adverse shocks during periods of high uncertainty and risks related to geopolitical
events, for example. Taken together, the findings support Hypothesis 2a that the adverse influence of geopolitical risks on corporate
investment is less pronounced in firms that have high cash holdings.
5.2. The effect of investment irreversibility
Previous studies show that firms can minimize costly mistakes by postponing investment decisions or reducing their investment
expenditure to “wait and see” if a better future materializes (Bernanke, 1983; Dixit et al., 1994). Gulen and Ion (2016) find that firms
delay their investments up to eight quarters; therefore, firms that could reverse investment at a relatively low cost have fewer benefits
from waiting for a resolution of the uncertainty compared to high investment irreversibility firms. This line of argument conjectures
8
BRICS nations include Brazil, Russia, India, China and South Africa.
11
Table 7
The role of cash holdings and investment irreversibility.
(1) (2)
GPR − 0.003** 0.005

(-2.125) (1.341)
HIGH CASH 0.293*
(1.702)
GPR × HIGH CASH 0.005***
(3.107)
HIGH FA 4.439***
(6.543)
GPR × HIGH FA − 0.014**
(-2.485)
SIZE 0.187** 0.162**
(2.670) (2.051)
AGE − 1.194*** − 1.133***
(-8.304) (-8.255)
SALES GROWTH 1.154*** 1.225***
(4.433) (5.547)
LEV 0.207 − 0.502
(0.505) (-1.378)
OANCF 13.757*** 10.764***
(24.673) (25.244)
ROE 0.802*** 1.159***
(2.998) (4.515)
SD4_ROA − 1.343* − 1.116
(-1.814) (-1.364)
RULE OF LAW − 0.243 − 0.304
(-0.777) (-0.755)
INVESTMENT FREEDOM 0.002 0.005
(0.166) (0.336)
GDPGROWTH 0.331 − 0.957
(0.078) (-0.209)
INFLATION − 0.124 0.843
(-0.086) (0.521)
CONSTANT 7.141*** 5.191***
(6.365) (3.576)
Industry fixed effects YES YES
Country fixed effects YES YES
Year fixed effects YES YES
Adjusted R2 0.105 0.161
Observations 96,618 96,618
This table shows the results of the effect of geopolitical risk on firm investment, conditional on cash
holdings in Column (1) and investment irreversibility in Column (2). HIGH CASH is a dummy variable that
equals one if a firm’s ratio of cash and equivalents to total assets in each year is higher than the sample
median and zero otherwise. HIGH FA is a dummy variable that equals one if a firm’s ratio of fixed assets to
total assets in each year is higher than the sample median and zero otherwise. CAPX/ASSET is the
dependent variable for all specifications. The definitions of the variables are provided in the Appendix.
Industry, country and year fixed effects are included in the models. The coefficient estimates and t-sta
tistics are reported based on robust standard errors clustered by country. *, ** and *** indicate statistical
that the negative impact of geopolitical risk on corporate investment should be more pronounced for firms with high investment
irreversibility (fixed assets). To test this hypothesis, we introduce an interaction term between GPR and a firm’s investment irre
versibility (HIGH FA). Following Cooper (2006), we employ asset tangibility as a measure of investment irreversibility. HIGH FA is an
indicator variable coded one if a firm’s ratio of tangible assets to total assets is higher than the sample median in a given year and zero
otherwise. We construct the following model specification:
CAPX/ASSETi,j,t = β1GPRj,t + β2HIGH FAi,j,t +β3GPRj,t×HIGH FAi,j,t+δ’Firm controli,j,t +η’Country controlj,t+Industry Fixed Effects +
Country Fixed Effects + Year Fixed Effects+εi,j,t (4)
Our main interest of variables is the coefficient on the interaction terms (β3), which captures the difference in the effect of GPR on
corporate investment between firms with high and low investment irreversibility. In line with Hypothesis 2b, we expect that β3 should
be negative and significant.
The results of this analysis are reported in column (2) of Table 7. We observe that the coefficient on the interaction terms GPR ×
HIGH FA is negative and significant at the conventional level, consistent with the notion that firms with a higher proportion of
irreversible investments will be more sensitive to changes in geopolitical risk. Eventually, they bear a higher investment reduction
12
under increasing geopolitical risk, confirming Hypothesis 2b that the negative impact of geopolitical risk on corporate investment is
more pronounced for firms with high irreversible investments.
6. Robustness checks
Thus far, we have provided fruitful evidence that geopolitical risk discourages corporate investment. However, several alternative
explanations may explain our results. In this section, we robust our findings in several ways: (1) using alternative measures of
corporate investment; (2) using alternative proxies of geopolitical risks; and (3) controlling for overrepresentation of the sample.
6.1. Alternative measures of corporate investment
We first use alternative proxies of corporate investment. In our baseline regression, we use the ratio of capital expenditures, scaled
by total assets, to measure corporate investment. To robustly test our results, we use the natural logarithm of capital expenditures and
the ratio of capital expenditures to sales as two alternative measures of corporate investment. We rerun our baseline models again and
present the results in Table 8. Overall, all coefficients on geopolitical risks remain unchanged and highly statistically significant,
indicating that geopolitical risks reduce corporate investment. The coefficients on the interactions of GPR ×HIGH CASH and GPR
×HIGH FA are positive and negative, respectively. This supports the view that the negative effect of geopolitical risks on corporate
investment is less pronounced for firms with high cash holdings but more pronounced for firms with high investment irreversibility. In
Table 8
Robustness check 1. Alternative measures of corporate investment.
Log(CAPX) CAPX/SALES
(1) (2) (3) (4) (5) (6)
GPR − 0.002** − 0.004*** 0.003 − 0.018** − 0.041 − 0.008**

(-2.168) (-4.220) (1.428) (-2.185) (-0.057) (2.189)
HIGH CASH 0.223* − 0.005
(1.832) (-0.507)
GPR × HIGH CASH 0.003** 0.010***
(2.392) (3.451)
HIGH FA 0.957*** 0.073***
(4.379) (13.618)
GPR × HIGH FA − 0.011*** − 0.137**
(-4.226) (-2.797)
SIZE 0.070*** 0.072*** 0.066** 0.002** 0.003* 0.002*
(3.697) (3.863) (3.126) (2.035) (1.778) (1.831)
AGE − 0.229*** − 0.233*** − 0.240*** − 0.019*** − 0.020*** − 0.020***
(-3.908) (-3.946) (-4.255) (-4.491) (-4.378) (-4.817)
SALES GROWTH 0.290*** 0.292*** 0.320*** 0.005 0.005 0.007**
(4.442) (4.380) (5.695) (1.257) (1.303) (2.420)
LEV 0.004 − 0.082 − 0.562*** 0.020** 0.012 − 0.024***
(0.027) (-0.631) (-3.488) (2.671) (1.537) (-5.949)
OANCF 3.731*** 3.782*** 2.664*** 0.070*** 0.075*** − 0.013
(15.545) (15.428) (10.468) (9.595) (8.638) (-0.923)
ROE 0.287*** 0.293*** 0.407*** − 0.013** − 0.012** − 0.003
(3.662) (3.863) (5.324) (-2.716) (-2.470) (-0.633)
SD4_ROA − 1.653*** − 1.624*** − 1.416*** − 0.003 − 0.001 0.015
(-6.074) (-5.734) (-4.311) (-0.205) (-0.060) (0.832)
RULE OF LAW − 0.020 − 0.004 0.007 − 0.011 − 0.010 − 0.009
(-0.219) (-0.051) (0.072) (-1.196) (-1.123) (-0.866)
INVESTMENT FREEDOM − 0.002 − 0.003 − 0.003 − 0.000 − 0.000 − 0.000
(-0.720) (-0.991) (-0.833) (-0.953) (-1.052) (-0.925)
GDPGROWTH 0.928 1.039 1.187 0.052 0.067 0.072
(1.135) (1.310) (1.381) (0.411) (0.503) (0.546)
INFLATION − 0.699 − 0.773 − 0.745 − 0.112 − 0.121 − 0.115
(-1.469) (-1.620) (-1.749) (-1.717) (-1.746) (-1.672)
CONSTANT − 3.416*** − 3.497*** − 3.711*** 0.166*** 0.165*** 0.131***
(-13.565) (-15.208) (-10.538) (5.955) (5.779) (4.324)
Industry fixed effects YES YES YES YES YES YES
Country fixed effects YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES
Adjusted R2 0.133 0.133 0.221 0.037 0.038 0.105
Observations 96,618 96,618 96,618 96,618 96,618 96,618
This table reports the results using the natural logarithm of capital expenditures in columns (1) to (3) and the ratio of capital expenditures to sales in
columns (4) to (6) as the dependent variables. Our estimation model remains the same, as discussed in Tables 4 – 7. The definitions of the variables are
provided in the Appendix. Industry, country and year fixed effects are included in the models. The coefficient estimates and t-statistics are reported
based on robust standard errors clustered by country. *, ** and *** indicate statistical significance at the 10 %, 5 % and 1 % levels, respectively.
13
A.-T. Le and T.P. Tran
Table 9
Robustness check 2. Alternative measures of geopolitical risks.
GPR= ICRG GPR_DECEMBER ΔLN(GPR) ΔGPR
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
GPR − 0.009*** − 0.027*** − 0.014** − 0.008*** − 0.002 − 0.006* − 0.039*** − 0.392* 0.197 − 0.008** − 0.003* − 0.002
(-3.149) (-4.037) (-2.610) (-2.882) (-0.794) (1.739) (-3.217) (-1.903) (1.057) (-2.223) (-1.879) (-1.104)
HIGH CASH 0.558*** 0.395 0.708*** 0.706***
(3.727) (1.275) (4.867) (4.795)
GPR × HIGH CASH 0.017** 0.005*** 0.894** 0.008***
(3.026) (2.829) (2.918) (2.974)
HIGH FA 3.968*** 4.795*** 3.039*** 3.039***
(19.770) (6.852) (13.034) (12.996)
GPR × HIGH FA − 0.002*** − 0.014** − 0.011** − 0.001*
(-3.164) (-2.501) (-2.045) (-1.736)
SIZE 0.188** 0.211*** 0.177** 0.180** 0.189** 0.157* 0.209** 0.222** 0.198** 0.209** 0.221** 0.198**
(2.933) (3.280) (2.429) (2.590) (2.702) (1.948) (2.832) (2.923) (2.570) (2.834) (2.920) (2.569)
AGE − 1.203*** − 1.215*** − 1.249*** − 1.192*** − 1.195*** − 1.144*** − 1.190*** − 1.192*** − 1.135*** − 1.190*** − 1.192*** − 1.135***
(-9.018) (-8.584) (-10.247) (-8.845) (-8.324) (-8.473) (-8.174) (-7.602) (-7.572) (-8.174) (-7.601) (-7.570)
SALES GROWTH 1.134*** 1.145*** 1.255*** 1.152*** 1.155*** 1.225*** 1.144*** 1.148*** 1.223*** 1.144*** 1.148*** 1.223***
(4.248) (4.243) (5.520) (4.496) (4.443) (5.676) (3.606) (3.524) (4.291) (3.606) (3.523) (4.294)
LEV 0.874* − 0.173 − 1.573*** 0.788* 0.050 − 0.847** 0.943* 0.377 − 0.328 0.943* 0.378 − 0.329
(2.185) (-0.459) (-4.777) (2.057) (0.124) (-2.550) (2.267) (0.891) (-0.922) (2.267) (0.894) (-0.923)
OANCF 13.271*** 13.805*** 8.730*** 13.328*** 13.784*** 10.110*** 13.292*** 13.669*** 10.758*** 13.292*** 13.671*** 10.758***
14
(24.089) (24.720) (12.714) (24.106) (25.010) (22.479) (20.536) (21.522) (21.699) (20.539) (21.532) (21.676)
ROE 0.724** 0.802** 1.247*** 0.723** 0.813** 1.227*** 0.886** 0.952*** 1.299*** 0.886** 0.952*** 1.299***
(2.496) (2.771) (4.557) (2.621) (3.027) (4.590) (3.189) (3.559) (4.601) (3.189) (3.557) (4.598)
SD4_ROA − 1.470* − 1.095 − 0.359 − 1.412* − 1.313 − 1.070 − 1.834* − 1.750* − 1.538 − 1.834* − 1.751* − 1.538
(-2.090) (-1.503) (-0.430) (-1.977) (-1.741) (-1.327) (-2.268) (-2.068) (-1.612) (-2.271) (-2.069) (-1.612)
RULE OF LAW − 0.278 − 0.224 − 0.172 − 0.292 − 0.234 − 0.330 − 0.473 − 0.483 − 0.574 − 0.473 − 0.481 − 0.573
(-0.850) (-0.767) (-0.470) (-0.857) (-0.768) (-0.823) (-1.396) (-1.462) (-1.450) (-1.393) (-1.451) (-1.443)

INVESTMENT FREEDOM 0.003 0.001 0.000 0.004 0.001 0.005 − 0.000 − 0.001 − 0.002 − 0.000 − 0.001 − 0.002
(0.203) (0.104) (0.033) (0.291) (0.137) (0.359) (-0.009) (-0.114) (-0.105) (-0.009) (-0.116) (-0.103)
GDPGROWTH − 2.470 − 2.647 − 2.406 − 0.880 0.674 − 0.239 − 0.018 − 0.010 − 0.027 − 0.018 − 0.010 − 0.027
(-0.627) (-0.645) (-0.618) (-0.205) (0.158) (-0.052) (-0.399) (-0.207) (-0.556) (-0.399) (-0.204) (-0.549)
INFLATION 1.333 0.692 1.399 0.494 − 0.327 0.792 1.290 0.518 2.227 1.282 0.538 2.263
(0.711) (0.438) (0.878) (0.299) (-0.230) (0.514) (0.584) (0.263) (0.944) (0.584) (0.275) (0.969)
CONSTANT 7.689*** 7.902*** 6.867*** 7.403*** 7.064*** 5.010*** 7.983*** 7.586*** 6.679*** 7.984*** 7.586*** 6.673***
(8.034) (8.328) (6.272) (6.779) (6.337) (3.497) (10.486) (10.073) (7.682) (10.466) (10.053) (7.651)
Industry fixed effects YES YES YES YES YES YES YES YES YES YES YES YES
Country fixed effects YES YES YES YES YES YES YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES YES YES YES YES YES YES
Adjusted R2 0.182 0.107 0.195 0.101 0.105 0.196 0.102 0.106 0.168 0.102 0.106 0.161
Observations 96,618 96,618 96,618 96,618 96,618 96,618 96,618 96,618 96,618 96,618 96,618 96,618
This table reports regression results using political risk from ICRG in columns (1) to (3) and December’s geopolitical risk index by Caldara and Iacoviello (2018) in columns (4) to (6), log-change in
geopolitical risk index in columns (7) to (9), and changes in geopolitical risk index in columns (10) to (12) as alternative measures of geopolitical risk. Our estimation model remains the same, as discussed
in Tables 4 – 7. The definitions of the variables are provided in the Appendix. Industry, country and year fixed effects are included in the models. The coefficient estimates and t-statistics are reported based
on robust standard errors clustered by country. *, ** and *** indicate statistical significance at the 10 %, 5 % and 1 % levels, respectively.
sum, our findings are robust to alternative definitions of corporate investment.
6.2. Alternative measures of geopolitical risk
We further substitute the measures of geopolitical risk. First, we employ the political risk index from ICRG published by the Political
Risk Service Group. The ICRG provides a monthly index for 140 countries, which we average into annual scores as in previous studies
(Al-Shboul et al., 2020). This index includes 12 weighted components: government stability, socioeconomic conditions, investment
profile, internal conflict, external conflict, corruption, presence of the military in politics, religious tensions, law and order, ethnic
tensions, democratic accountability and bureaucracy quality. The sum of these components ranges from 0 to 100, with a higher score
denoting a lower risk. To simplify the interpretation of the results, we use 100 minus the original value to transform the ICRG into a
new index whereby a higher score indicates higher risk. Second, in the baseline regression, we use the average monthly geopolitical risk
index as our main proxy for geopolitical risk. We now employ the value of geopolitical risk in the last month (December) of each year as
an alternative measure. Third, to capture the accurate effect of geopolitical risk, we also use the log-change in the geopolitical risk
index over the two-year period. Finally, we follow Baur and Smales (2020) by using yearly changes in the GPR index (ΔGPR) to
measure geopolitical uncertainty.
We perform the regression again and report the estimation results in Table 9. Not surprisingly, we observe a negative relation
between geopolitical risks and corporate investment. This effect is less pronounced for firms with high cash holdings but stronger for
firms with high fixed assets. Hence, our explorations are basically unchanged after taking into consideration alternative definitions of
Table 10
Robustness checks 3. Overrepresentation of sample.
Excluding China WLS model
(1) (2) (3) (4) (5) (6)
GPR − 0.003** − 0.005* 0.002 − 0.005* − 0.002 0.002

(-2.021) (-1.836) (0.451) (-1.847) (-0.685) (0.778)
HIGH CASH 0.884** 0.747
(2.274) (1.356)
GPR × HIGH CASH 0.003* 0.002***
(1.819) (3.429)
HIGH FA 5.133*** 4.745***
(7.611) (6.307)
GPR × HIGH FA − 0.012** − 0.013**
(-2.290) (-2.098)
SIZE 0.163** 0.177** 0.142* 0.273** 0.282** 0.256**
(2.424) (2.710) (1.934) (2.963) (2.985) (2.549)
AGE − 1.052*** − 1.050*** − 1.096*** − 1.314*** − 1.332*** − 1.285***
(-10.234) (-11.097) (-14.134) (-8.405) (-7.836) (-8.670)
SALES GROWTH 1.355*** 1.356*** 1.410*** 1.074*** 1.090*** 1.165***
(4.956) (4.976) (5.769) (3.354) (3.336) (4.299)
LEV 0.684 − 0.340 − 1.527*** 0.878** − 0.014 − 0.875**
(1.506) (-0.808) (-3.868) (2.384) (-0.035) (-2.736)
OANCF 13.643*** 14.411*** 9.416*** 13.118*** 13.487*** 9.648***
(21.796) (23.027) (22.381) (19.723) (19.787) (18.770)
ROE 0.577* 0.680* 1.086*** 1.035*** 1.116*** 1.521***
(1.891) (2.169) (3.886) (4.803) (4.962) (6.810)
SD4_ROA − 1.008 − 0.431 0.369 − 1.615** − 1.507* − 1.471
(-1.381) (-0.728) (0.553) (-2.562) (-1.972) (-1.803)
RULE OF LAW − 0.302 − 0.164 − 0.268 − 0.078 − 0.119 − 0.045
(-0.884) (-0.550) (-0.771) (-0.223) (-0.381) (-0.108)
INVESTMENT FREEDOM 0.005 0.007 0.010 − 0.013 − 0.013 − 0.017
(0.343) (0.651) (0.688) (-0.860) (-0.980) (-1.042)
GDPGROWTH 0.052 − 0.915 1.341 − 6.990 − 5.019 − 7.443
(0.013) (-0.245) (0.353) (-1.101) (-0.805) (-1.091)
INFLATION 0.800 0.913 0.944 − 1.478 − 3.540 − 1.050
(0.410) (0.527) (0.547) (-0.624) (-1.300) (-0.443)
CONSTANT 7.226*** 6.694*** 5.076*** 9.008*** 8.423*** 7.106***
(6.752) (6.574) (4.294) (6.999) (6.627) (4.596)
Industry fixed effects YES YES YES YES YES YES
Country fixed effects YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES
Adjusted R2 0.098 0.103 0.188 0.112 0.114 0.212
Observations 77,304 77,304 77,304 96,618 96,618 96,618
This table reports regression results using subsamples, excluding China, in Columns (1) to (3) and using the WLS model in Columns (4) to (6). Our
estimation model remains the same, as discussed in Tables 4 to 7. CAPX/ASSET is the dependent variable for all specifications. The Appendix reports
all definitions of variables. Industry, country and year fixed effects are included in the models. The coefficient estimates and t-statistics are reported
based on robust standard errors clustered by country. *, ** and *** indicate statistical significance at the 10 %, 5 % and 1 % levels, respectively.
15
geopolitical risk.
6.3. The sensitivity of sample size
Our sample includes the data of nine Asian emerging countries, but the number of observations appears to vary in each country, as
presented in Table 1. China becomes the largest contributor to our sample, whereas Russia accounts for a minority of the total ob
servations. This raises a caveat regarding whether our estimation may be biased due to overrepresentation. To eliminate such a
problem, we reestimate our analysis using a reduced sample and carry out weighted least squares (WLS) estimation. Specifically,
Columns (1) to (3) of Table 10 report estimation results using a sample excluding observations in China. The results for the WLS
estimation are shown in Columns (4) to (6), in which we weight the coefficients by the number of observations in each country, as
suggested in Li (2019).
As shown across specifications, the coefficients on GPR are negative and significant at the conventional level. As suggested in the
previous table, we find that the interaction between geopolitical risk and cash holdings is positive but becomes negative when we
interact geopolitical risk with investment irreversibility. Overall, we reveal that our previous findings are unbiased by the over
representation of the sample.
7. Conclusion
Uncertainty induced by geographical and political environments may potentially affect corporate decisions and directly harm a
firm’s survival in the long run. This paper exploits an exogenous increase in risk from geopolitical events to examine how greater
uncertainty affects corporate investment in emerging Asian countries. We first document that geopolitical risks are negatively asso
ciated with the investment of firms. We observe that geopolitical risks in China and Russia have a greater impact on corporate in
vestment, while a less significant influence is found in India and Turkey. Our findings are robust to alternative measures of investment
and geopolitical risks addressing endogeneity problems, even after controlling for the overrepresentation of the sample. Further
analysis indicates that the negative effect of risks related to geopolitical events is less pronounced for firms with high cash holdings,
consistent with the view of precautionary saving motives. We find that firms hold more cash to mitigate the adverse impact of
geopolitical risks on firm investment. In addition, we also indicate that firms that have higher investment irreversibility tend to bear a
higher adverse impact of geopolitical risk on their investment.
Investment plays a pivotal role in achieving firm growth and performance. The existing literature documents that corporate in
vestment is affected by many environmental factors. Political risks and geographic shocks have received attention from emerging
studies in finance research. By examining the influence of geopolitical risks on investment, our study delivers crucial implications for
policymakers in designing a comprehensive set of appropriate regulations. Moreover, the findings of this study may benefit managers
in developing corporate policies to deal with uncertainty during business operations.
Acknowledgments
We appreciate the insightful comments and suggestions of Peter Szilagyi (Editor) and three anonymous referees. This research is
funded by the joint-research fund from the University of Economics Ho Chi Minh City and Western Sydney University Vietnam. All
errors and omissions are our own.
Appendix A. Variables definitions
Variables Definition Sources
CAPX/ASSET The ratio of capital expenditures to total assets Compustat Global

LOG(CAPX) Natural logarithm of capital expenditures As above
CAPX/SALES The ratio of capital expenditures to sales As above
GPR The geopolitical risks by Dario and Iacoviello (2020). Policyuncertainty.com
INCREMENTAL GPR The residuals from the equation of geopolitical risk on economic policy uncertainty Authors’ estimation based on data from
policyuncertainty.com
ICRG The original score of the International Country Risk Guide indicates the perceived level of The International Country Risk Guide
prevailing political uncertainty on a scale of 0–100, with a higher score suggesting a lower (ICRG)
political uncertainty. We use 100 deducted by this x, rendering ICRG with a higher score
indicating greater political risk.
EPU Economic policy uncertainty, measured as the average of the 12-month EPU index in a given policyuncertainty.com
year
SIZE Natural logarithm of total book assets Compustat Global
AGE Natural logarithm of number of years since incorporation As above
SALES GROWTH The percentage change in sales As above
LEV Leverage ratio as the sum of debt in current liabilities and total long-term debt, divided by As above
total assets
OANCF The ratio of cash flow to total assets As above
(continued on next page)
16
(continued )
Variables Definition Sources
ROE Net income on total equity As above

SD4_ROA Standard deviation of firm i’s return on assets (ROA) using four-year rolling window. As above
RULE OF LAW Annual rule of law index, which captures perceptions of the extent to which agents have Kaufmann et al. (2009)
confidence in and abide by the rules of society and, in particular, the quality of contract
enforcement, property rights, the police, and the courts, as well as the likelihood of crime and
violence.
INVESTMENT Investment Freedom Index measures constraints on the flow of investment capital. This index Heritage Foundation
FREEDOM ranges from 0 to 100. An ideal country would receive a score of 100 on the investment
freedom.
GDP GROWTH The growth rate of the real gross domestic product World Bank Indicator
INFLATION The inflation rate based on the GDP deflator index for each country As above
HIGH CASH A dummy variable, which equals one if a firm’s ratio of cash and equivalents to total assets is Compustat Global
higher than the sample median in each year, zero otherwise
HIGH FA A dummy variable, which equals one if a firm’s ratio of fixed assets to total assets is higher As above
than the sample median in each year, zero otherwise
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Geopolitical Risk and Investment

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Journal of Multinational Financial Management 62 (2021) 100703

Contents lists available at ScienceDirect

Journal of Multinational Financial Management

Does geopolitical risk matter for corporate investment? Evidence

2. Literature review and hypothesis development

2.1. Geopolitical risk and corporate investment

Hypothesis 1. Geopolitical risk is negatively associated with corporate investment.

2.2. Moderating impact of cash holdings and investment irreversibility

3. Sample, variables and model

3.1. Sample selection

3.2. Variables construction

3.2.1. Dependent variable: capital expenditures

3.2.2. Main independent variable: geopolitical risk

3.2.3. Control variables

4.1. Descriptive statistics

China 19,314 19.99 105.2 175.5 − 0.422 26.82 0.086 0.037

Panel B. Sample distribution by year

Year N Year N Year N Year N

1995 394 2001 1,650 2007 4,201 2013 6,357

Panel C. Sample distribution by industry

Industry 2-digit SIC N Industry 2-digit SIC N

Agriculture 01-09 2,344 Transportation 40-48 12,101

CAPX/ASSET (%) 5.381 6.011 0.016 3.458 77.12

4.2. Baseline results

(1) CAPX/ASSET 1.00

Journal of Multinational Financial Management 62 (2021) 100703

(1) (2) (3) (4)

GPR − 0.007*** − 0.003*** − 0.003*** − 0.002***

CAPX/ASSET GPR CAPX/ASSET CAPX/ASSET CAPX/ASSET

GPR − 0.012*** − 0.001**

in response to geopolitical uncertainty.

GPRj,t = α+βEPUj,t +εj,t (2)

4.4. Geopolitical risk influence across countries

5.1. The role of cash holdings

5.2. The effect of investment irreversibility

GPR − 0.003** 0.005

6.1. Alternative measures of corporate investment

(1) (2) (3) (4) (5) (6)

GPR − 0.002** − 0.004*** 0.003 − 0.018** − 0.041 − 0.008**

Journal of Multinational Financial Management 62 (2021) 100703

sum, our findings are robust to alternative definitions of corporate investment.

6.2. Alternative measures of geopolitical risk

(1) (2) (3) (4) (5) (6)

GPR − 0.003** − 0.005* 0.002 − 0.005* − 0.002 0.002

6.3. The sensitivity of sample size

Appendix A. Variables definitions

Variables Definition Sources

CAPX/ASSET The ratio of capital expenditures to total assets Compustat Global

ROE Net income on total equity As above

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GPR − 0.007* − 0.003* − 0.003* − 0.002*

GPR − 0.012* − 0.001

GPR − 0.002 − 0.004* 0.003 − 0.018 − 0.041 − 0.008