Australian policy uncertainty and corporate investment

This study examines the impact of economic policy uncertainty (EPU) on capital investment by Australian firms. Following a replication of prior US evidence (Gulen and Ion 2016), we show that EPU has a persistent and negative effect (up to four years) on capital investment by Australian Stock Exchange (ASX) listed firms, in contrast to the more short-lived effect of EPU in the US. The different results are consistent with the high proportion of ASX-listed firms in the resources and mining industries, where investment projects frequently proceed in stages and have time-to-build considerations. In accordance with real option theory, the findings reinforce the notion that EPU can dampen investment opportunities due to investment irreversibility.