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. •This study tests economic policy uncertainty (EPU) and firm investment in Australia.•EPU has a persistent and negative effect (up to 4 years) on capital investment.•This is in contrast to the short-lived effect of EPU on investment in the US.•Investment projects in Australia proceed in stages and have time-to-build concerns.•EPU can dampen investment opportunities due to investment irreversibility.