Geopolitical risk and corporate investment inefficiency: evidence from India

Abstract

Purpose – Thisstudy investigatesthe influence of geopolitical risk on firm investment inefficiency and explore the moderating role of corporate governance on the above relationship using a dataset of 43,182 observations from Indian-listed firms between 2002 and 2023. Design/methodology/approach – The study employs pooled ordinary least squares regression models with firm and year fixed effects. Robustness tests include entropy balancing and alternative proxies, quantile regression and endogeneity checks via two-stage least squares and Oster (2019) omitted variables test. Findings – The results shows that heightened geopolitical risk significantly worsens investment inefficiency, increasing both overinvestment and underinvestment, while strong corporate governance mitigates these effects. Cross-sectional analysis shows the impact is more pronounced in firms with lower cash holdings, more irreversible investments, fewer financial constraints, those operating in industries with higher exposure to geopolitical risk and those in competitive industries. Practical implications – The study highlights the positive impact of geopolitical risk on investment inefficiency, emphasizing the need for financial support mechanisms such as subsidies and credit facilities. Firms should adopt proactive investment strategies while strengthening corporate governance, disclosure and transparency to reduce information asymmetry. Investors should prioritize firms with strong governance, and regulators must promote competition-friendly policies to ensure efficient capital allocation under high geopolitical risk. Originality/value – This study advances corporate finance literature by providing new evidence regarding the impact of geopolitical risk on investment inefficiency. It is among the first studies to show that strong corporate governance mitigates adverse effects of geopolitical risk. Additionally, it examines how cash holdings, irreversible investments, financial constraints and market competition shape the geopolitical risk–investment inefficiency relationship.