Defining the dimensions of uncertainty and investigating their individual and aggregate impacts on sub-industry corporate investments in the United States

Abstract

This paper investigates the impact of multiple dimensions of uncertainty - economic policy, political and geopolitical uncertainty on corporate investment decisions in the United States over the period 2000 to 2023. With global events such as Covid-19 and rising trends such as geopolitical tensions and trade wars, it has become increasingly important to understand the impacts of uncertainty on corporate investment levels. Prior studies largely focus on one aspect of uncertainty, whereas our study aims to understand the different dimensions of uncertainty. Our study is novel in that it studies multiple dimensions of uncertainty, along with pandemic and post-pandemic conditions. Using panel data from 63 US sub-industries, we employ fixed effect regression models to quantify the impacts of uncertainty on investment. Our methodology incorporates various proxies for uncertainty, along with dummy variables for events such as Covid-19 and the Great Financial Crisis. We further control using common macroeconomic variables. Our findings display a strong negative relationship between uncertainty dimensions and corporate investments, especially for geopolitical uncertainty.