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The objective of this paper is threefold. First, it aims to empirically study whether firm-specific/idiosyncratic uncertainty, macroeconomic/aggregate uncertainty and political uncertainty have an adverse influence on firms' investment decisions in Pakistan. After establishing this, it scrutinizes whether the uncertainty effects on investment are different for firms of different sizes. Finally, it investigates whether any heterogeneity exists in the uncertainty impacts across different industries.

The empirical analysis is based on an unbalanced panel data of 468 nonfinancial firms listed at the Pakistan Stock Exchange (PSX) during the period 2000–2018. Departing from the literature, the paper builds a time-varying composite volatility/uncertainty index based on the principal component analysis (PCA) by utilizing the constructed volatility series for sales, cash flows and return on assets to gauge firm-specific uncertainty for each firm included in the analysis. Likewise, the paper develops a PCA-based composite index for macroeconomic uncertainty by using the conditional variance series of consumer price index (CPI), industrial production index (IPI), the interest rate and the exchange rate obtained by estimating the (generalized) autoregressive conditional heteroscedastic, (G)ARCH, models. Finally, political uncertainty is measured by political risk components maintained by the Political Risk Services Group. The empirical framework of the paper augments the standard investment equation by incorporating all three types of uncertainty. Firms are grouped into small, medium and large categories based on firms' total assets and the size indicators are generated. Next, the indicators are multiplied by each uncertainty measure to quantify the differential effects of uncertainty across firm size. Firms are also differentiated by sectors to explore the sector-based asymmetries in the uncertainty effects. The “robust two-step system generalized method of moments (2SYS GMM) (dynamic panel data) estimator” is applied to estimate the empirical models.

The results provide robust and strong evidence of the detrimental influence of all three types of uncertainty on investment. Yet, it is observed that the strength of the influence considerably varies across uncertainty types. In particular, compared to firm-specific uncertainty, both macroeconomic and political uncertainties have more unfavorable effects. The analysis also reveals that the effects of all three types of uncertainty are quite different at small, medium and large firms. Specifically, it is observed that although the investment of all firms is influenced adversely by magnified uncertainty, the adverse effects of all three kinds of uncertainty are quite stronger at small firms than medium and large firms. These findings support the phenomenon of size-based asymmetries in the effects of uncertainty on investment. The results also provide evidence that either type of uncertainty quite differently affects the investment policy of firms in different sectors.

The findings help different stakeholders to know how different types of uncertainty differently affect corporate firms' investments. Further, they suggest that firm size has a vital role in ascertaining the adverse effects of uncertainty on investment. The paper identifies to which type of uncertainty investors and policymakers should care more about and to which types of firms and industries they should concern more during volatile times. Firms should have more fixed assets and expand their size to mitigate the detrimental effects on investment of internal and external uncertainties. The government should enhance the political stability to induce firms for a higher level of investment, which, in turn, will result in higher growth of the economy.

The originality of the paper is credited to four aspects. First, unlike most previous studies that have utilized a single volatility measure, this paper constructs composite uncertainty indices based on the weights determined by the PCA. Second, it examines the effect of political uncertainty over and above the effects of idiosyncratic and aggregate (macroeconomic uncertainty) for an emerging economy. Third, and most important, it provides first-hand empirical evidence on the role of firm size in establishing the asymmetric effects of uncertainty on investment. Finally, it provides evidence on the industry-based heterogeneity in the uncertainty effects.

This study estimates the effects of political uncertainty and economic policy uncertainty on business confidence. Moreover, it also examines business confidence as a transmission channel of political uncertainty and economic policy uncertainty to investment.

The study addresses the Brazilian case from May 2004 to December 2017. Brazil experienced situations of political instability and public distrust in government and its policies, which reflected on the economic environment. The study uses two business confidence indicators that capture entrepreneurs' sentiment in relation to their business and the economy. All models are estimated using ordinary least squares and generalized method of moments.

The estimates reveal that increases in both political uncertainty and economic policy uncertainty reduce business confidence. The findings also indicate that business confidence acts as a transmission mechanism, i.e. uncertainties affect investments through business confidence.

The findings point to the following practical implications related to the existence of uncertainties in the Brazilian economy: different institutional difficulties and government indecisions have blurred the political scene and caused political uncertainties. In addition, the same aspects that blurred the political scene also caused uncertainties in relation to economic policy that undermined business confidence, and affected investment.

There is a vast literature on business confidence, as well as studies addressing the relationship between business confidence and investment. This study differs from other studies as follows: in addition to the political uncertainty, it also analyzes the effect of economic policy uncertainty on business confidence; it uses different measures to capture political instability, and it analyzes whether business confidence acts as a transmission channel of both uncertainties to investments.

This paper documents the impact of political uncertainty on the decision of private firms to use external auditors to verify their financial statements.

The authors use the data from 141 countries and the pooled logistic regression to test our arguments. The data is provided by the World Bank's Enterprise Surveys and is collected during the period between 2006 and 2019.

The results show that firms with high exposure to political uncertainty are more likely to use external auditors to verify their financial statements. The results are robust across various sub-samples and hold when we use alternate proxy for political uncertainty. The results are also robust after controlling for potential endogeneity concerns. The authors also find that the effect of political uncertainty on the choice of external audit is more pronounced for firms that are headquartered in countries with weak institutional environment. The authors document significant role of democracy, rule of law and accountability in determining the relationship between political uncertainty and the choice of external audit.

The authors believe that theirs is one of the initial attempts (if not the first) to investigate the effect of political uncertainty on the choice of external audit among the private firms in developing countries.

The aim of this study is to investigate the impact of local political uncertainty on the asymmetric cost behavior (i.e. cost stickiness) for listed firms in China.

In this study, the authors manually collect the turnover data of prefecture-city officials as a measure of exogenous fluctuations in political uncertainty and obtain firm-level financial information from the China Stock Market Accounting Research (CSMAR) database. To perform the analysis, the authors augment the traditional cost stickiness model by including the interaction terms of the prefecture-city official turnover, and firm-level and prefecture-city level control variables.

The authors find that political turnover leads to a higher degree of cost stickiness, implying that firms retain slack resources when political uncertainty is high. Moreover, the effect of political turnover on cost stickiness is more pronounced for firms residing in regions with weaker institutional environments, and firms that are privately owned and with smaller size. The authors further provide evidence that policy uncertainty and the threat of losing political connection are two underlying channels. Overall, this study documents that the local political process is an important channel that influences corporate operational decisions.

This study provides the first piece of evidence on the relation between political uncertainty and cost stickiness at the local government level. Moreover, the authors propose and demonstrate two underlying channels through which political uncertainty affects firms' asymmetric cost behavior.

The purpose of this study is to examine the bi-directional causality between political uncertainty and the market risk premium in the US.

I use a theoretical model to motivate signs and then check signs based on a vector autoregression.

I find that political uncertainty has a small positive, delayed effect on the market risk premium. The market risk premium, on the other hand, has a large permanent, negative effect on political uncertainty.

This is the first research paper to consider the bi-directional effects of political uncertainty on the market risk premium and vice versa. It also finds interesting empirical results.

The purpose of the study is to examine the political sources of uncertainty in the internationalization process of small- and medium-sized enterprises (SMEs).

The authors theoretically derived a research model embracing three hypotheses. These hypotheses are tested on a sample of 203 on-site interviewed SMEs. Regression analysis is used to test two individual hypotheses and one interaction effect.

The regression analysis reveals that political knowledge possessed by the firm reduces uncertainty in the internationalization process. Political turbulence is shown to increase uncertainty in the internationalization. The interaction shows that political turbulence obliterates the uncertainty reducing effect by political knowledge.

The authors identifies two main political sources of uncertainty in the internationalization process of SMEs. For managers and business researchers, it is shown that experiential knowledge is useful under stable conditions. When turbulence increases, however, firms need to develop alternative strategies for uncertainty management.

This study is the first to test the uncertainty reducing effects of experiential knowledge in turbulent environments. Thus, by running the interaction between political knowledge and political turbulence, the authors shed new light on the usefulness of previous experiences in the internationalization process.

This paper aims to examine the association between political connections, political uncertainty and audit fees. The authors use various measures of political connections and uncertainty: political connections (civil and military), political events (elections) and a general measure of political stability (i.e. a world bank index).

The authors measure the association between political connections, political uncertainty and audit fees. Audit fees reflect auditors’ perceptions of risk. The authors examine auditors’ business risk, clients’ audit and business risk after controlling for the variables used in prior audit fee research.

Results indicate that civil-connected firms pay significantly higher audit fees than non-connected firms owing to the instability of civil-political connections. Military-connected firms pay significantly lower audit fees than non-connected firms owing to the stable form of government. Furthermore, considering high leverage as a measure of clients’ high audit risk and high return-on-assets (ROA) as a measure of clients’ lower business risk, the authors interact leverage and ROA with civil and military connections. The results reveal that these risks moderate the relationship between political connection and audit fees. Election risk is independent of risk associated with political connections. General political stability reinforces the theme that a stable government results in lower risks.

The authors combine cross-sectional measures of political uncertainty (civil or military connections) with time-dependent measures (general measures of political instability and elections).

This study examines the relationship between economic policy uncertainty (EPU) and managers' ex ante strategic choice on firms’ fixed and variable costs structure, i.e. cost rigidity and the moderating effect of government contracts and political connections.

Using a sample of 4,162 US firms during 2003–2019 and EPU measure from Baker et al. (2016), the authors examine the association between EPU and cost rigidity using multivariate regression analysis. The authors also examine the moderating effects of government customers and political connections using the subsampling method.

This study finds that increases in EPU leads to higher cost rigidity, suggesting that managers tend to look ahead and make an ex ante commitment to invest more in fixed costs to avoid congestion costs in anticipation of future product demand during EPU. The study also finds that the presence of government customers and political connections moderates the need for adopting greater cost rigidity.

This study measures firms' cost rigidity based on archival data. Future studies could utilize managers' cost structure choices using firms' internal management cost structure forecasts data to measure cost rigidity to examine the relationship between cost rigidity and EPU.

This study demonstrates that managers tend to make a proactive commitment to invest in fixed inputs when facing demand uncertainty from EPU to avoid congestion costs. This study also highlights the value of having government contracts and political connections by demonstrating that managers are less concerned about the congestion costs, hence weakening the impact of EPU on cost rigidity when they have government as major customers and/or political connections.

This study extends the management accounting literature by documenting that cost rigidity is related to EPU and that the relationship between cost rigidity and EPU also depends on whether the firm has government as major customers and/or political connections or not.

Uncertainties caused by political risks can drastically affect global supply chains. However, the supply chain management literature has thus far developed rather limited knowledge on firms' perception of and reactions to increased political risks. This study has two main purposes: to explore the relationship between extant risk exposure and perceived firm-specific political risk and to understand the impact of firm-specific political risk on firms' vertical integration and diversification strategies.

The authors developed a unique dataset for testing our hypotheses. Specifically, the authors sampled manufacturers (SIC20-39) listed in the United States from 2002 to 2019. The authors collected financial and diversification data from Compustat, vertical integration data from the Frésard-Hoberg-Phillips Vertical Relatedness Data Library and political risk data from the Economic Policy Uncertainty database. This data collection process yielded 1,287 firms (8,329 observations) with available data for analysis.

A two-way fixed-effect regression analysis of panel data revealed that firms tend to be more sensitive to political risk when faced with income stream uncertainty or strategic risk. By contrast, exposure to stock returns uncertainty does not significantly influence firms' sensitivity toward political risk. Moreover, firm-specific political risk is positively associated with vertical integration and product diversification. However, firm-specific political risk does not result in higher levels of geographical diversification.

This study joins the literature that systematically explores the antecedents and implications of firm-specific political risk, thus broadening the scope of supply chain risk management.

The study examines the association between firm-level political risk and corporate innovation and also this study explores how financial constraint and growth level of a firm influence this association.

A sample of 14,140 firm-year observations of the US firms from 2003 to 2020 is used. Unlike prior studies, this study uses a firm-level measure of political risk recently developed by Hassan et al. (2019) and measure innovation by patent and patent citation data and a text-based measure. A regression technique is used for empirical testing.

This study finds that firm-level political risk is negatively associated with innovation and also document that firm-level political risk has a negative impact on innovation for financially constrained and high growth firms. The overall results are robust after addressing the issue of potential endogeneity using entropy balancing and two-stage least squares regression techniques. This study also documents qualitatively consistent results after using alternative measures of innovation as well as firm-level political uncertainty.

The findings of this study could help the managers to make better investment decision and improve economic efficiency through understanding the effect of firm-level political risk on innovation activities.

The study concentrates on firm-level political risk and innovation and presents new insights that political risk at the microlevel is an important determinant for investment in innovative activities.