Will geopolitical risks only inhibit corporate investment? Evidence from China

Abstract

This paper uses data from Chinese listed companies to test the heterogeneous effects of China's local geopolitical risk (GPR_CHN) and global geopolitical risk (GPR) on Chinese corporate investments, as well as their economic mechanisms. The empirical results reveal that GPR_CHN primarily dampens corporate investment by increasing business operational risks and firms' cost of equity. Conversely, the inflow of international capital into China that results in a decrease in the cost of equity for listed companies, is the primary reason that GPR stimulates Chinese corporate investments. Furthermore, this paper tests the heterogeneous effects of global geopolitical threats (GPRT) and global geopolitical actions (GPRA) on corporate investment. Finally, we find that firm characteristics will influence the relationship between GPR and corporate investment in China.