Series: Working Papers. 1848.
Author: Daniel Dejuán and Corinna Ghirelli.
Topics: Business investment | Uncertainty | Economic growth and convergence | Non-financial corporations, businesses | SMEs and self-employed persons.
Published in: SERIEs Volume 12, Issue 3, Jun 2021, pp 351-388
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Abstract
The aim of this paper is to investigate the effect of policy uncertainty on firms’ investment
decisions. We focus on Spain for the period 1998-2014. To measure policy-related uncertainty,
we use a new macroeconomic indicator constructed for this country. We find strong evidence
that policy uncertainty reduces corporate investment. Furthermore, the heterogeneous results
suggest that the adverse effect of policy uncertainty is particularly relevant for highly vulnerable
firms. In particular, non-exporting firms, small and medium enterprises, as well as firms in
poorer financial condition are shown to decrease investment significantly more than their
counterparts. Overall, these results are consistent with the hypotheses that policy-related
uncertainty reduces corporate investment through increases in precautionary savings or to
worsening of credit conditions.