Handbook of Contemporary Research on Emerging Markets
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Handbook of Contemporary Research on Emerging Markets

Edited by Hemant Merchant

The Handbook brings together leading scholars from IB as well as other disciplines to contribute state-of-the-art thinking on emerging markets. The volume extends theoretical and conceptual thinking, looks at operational practices and their implications and provides a research agenda to move the field forward. The contributors offer an in-depth look at specific geographies and functional areas to enrich our understanding of emerging markets.
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Chapter 15: Government policy uncertainty and corporate investment in emerging markets

Chaiporn Vithessonthi


Today, in order to remain viable and profitable, firms compete not only against other domestic firms but also against multinational firms to maintain existing businesses and/or engage in new and more profitable businesses. In much of the existing corporate investment literature (Dasgupta and Sengupta, 2007; Fama, 1970; Innes, 1991; Lucas and Prescott, 1971; Modigliani and Merton, 1958; Moyen, 2004; Myers and Majluf, 1984), firms are often believed to take into account the degree of uncertainty when making investment decisions, and few are believed to make investment decisions without considering political risk (Bilson et al., 2002; Busse and Hefeker, 2007; Jiménez, 2010). However, few empirical studies have explicitly taken into account the influence of government policy uncertainty on corporate investment. While the idea that corporate investment tends to be industry-specific and dependent on market-wide conditions (e.g., procyclical or countercyclical) is perhaps well accepted in the literature, from my casual observations of the variation in corporate investment in emerging market countries, I see a different picture, with (1) the degree of political risk, on average, higher in developing countries than in advanced countries (Bilson et al., 2002), (2) higher political risk increasing firms’ financial leverage (Kesternich and Schnitzer, 2010), and (3) financial leverage negatively associated with investment (Ahn et al., 2006).

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