Gaurav Kankanhalli, Assistant Professor of Finance and Ben L. Fryrear Early Career Faculty Fellow
BA, University of Oxford; MS, University of Oxford; PhD, Cornell University
Why did you decide on this research topic?
I became interested in understanding how uncertainty shapes corporate decisions because of its profound yet sometimes overlooked impact on businesses and economies. Major economic shocks in recent decades, like the Global Financial Crisis, Brexit, or the COVID-19 pandemic, have shown us that uncertainty doesn’t merely slow down economic activity; it can fundamentally alter how companies plan their futures, allocate resources, and innovate.
Finance theories posit that corporate managers’ decisions to invest in new projects (hire workers and deploy capital) can be viewed as “real options.” These decisions can be costly to reverse if future business conditions turn out significantly better or worse than expected. The option to “wait-and-see” before committing to a new investment becomes more valuable during episodes of heightened economic uncertainty.
In other words, uncertainty makes firms cautious, causing delays in irreversible investment decisions. When I encountered these theories, I found them to be intuitive to understand and highly relevant to current economic conditions, both necessary ingredients for an exciting research topic!
Specifically, the numerous challenges in validating the predictions of these theories with real-world data drew me to engage in empirical research in this field. For instance, it has been challenging to precisely measure uncertainty, distinguish its specific effects from other simultaneous economic shifts, and identify exactly how businesses respond across different types of decisions.
Driven by these gaps, my research uses novel, detailed datasets (such as asset-level data from the global shipping industry) to explore previously unexamined aspects of how uncertainty influences firm behavior.
What were your key findings?
According to the 2024 Journal of Financial Economics publication:
My co-authors and I found that economic uncertainty significantly reshapes how firms manage their capital assets. We use detailed data from the global shipping industry, which is responsible for the vast majority of international trade, in which firms are significantly exposed to fluctuations in economic uncertainty. Using these data, we show that when uncertainty increases, firms pull back from both buying new, advanced ships and demolishing older, less productive ones. This cautious behavior arises because such decisions (ordering new, technologically advanced vessels or scrapping outdated ships) are particularly costly and difficult to reverse.
As a result, firms tend to keep their assets longer, causing their fleet to age and become less productive. Thus, uncertainty effectively delays the vital economic process of “creative destruction,” slowing innovation and reducing overall corporate productivity.
2025 working paper:
Our study reveals a new and important way uncertainty can shape entire industries: by encouraging banks to support financially distressed (“zombie”) firms, which would otherwise exit the market. Anticipating that uncertainty will prompt creditors to prop up these struggling rivals, healthier firms preemptively adjust by cutting back on their investments, hiring, and even the opening and closure of their business establishments.
Interestingly, while firms reduce their overall asset adjustments, leading to decreased productivity and lower market valuations, they simultaneously accelerate their innovation efforts to differentiate themselves from “zombie” competitors.
How do the findings of your research contribute to your field?
My research advances our understanding of how uncertainty impacts businesses by uncovering novel and nuanced mechanisms that were previously unexplored.
First, our work in the Journal of Financial Economics significantly enhances existing theories on corporate investment by demonstrating empirically that uncertainty doesn’t merely reduce investment overall; it specifically slows down the crucial economic process of “creative destruction.” Therefore, uncertainty can fundamentally weaken long-term productivity and growth through this new distortion we identify.
Second, in my paper on zombie firms, my co-authors and I introduce a completely new channel through which uncertainty affects industry dynamics: an “anticipation effect.” Prior studies focused primarily on the “direct effects” of existing zombie firms on industry rivals that are now forced to compete with them. Our research, however, shows how just the threat or expectation of zombification prompts healthy firms to proactively scale back investments and hiring, which slows economic recovery and distorts resource allocation. This finding adds depth to the current debate on the economic consequences of policy interventions during crises (e.g., financial support rendered by governments worldwide to firms during the COVID-19 pandemic), highlighting unintended effects that extend beyond immediate financial stability.
How do your research findings contribute to society (locally, regionally, nationally, globally)?
My work can guide local governments and regional policymakers in supporting businesses during uncertain economic times by uncovering how uncertainty impacts firms’ decisions about investment, employment, and innovation.
At the same time, my findings may inform national regulators about hidden costs and unintended consequences of certain economic policies, such as government guarantees that inadvertently sustain non-productive (“zombie”) firms. By recognizing these effects, policymakers can better tailor crisis-response strategies to support longer-term economic productivity.
On the global scale, in other work (published in the Journal of Financial and Quantitative Analysis), I show how economic uncertainty increasingly transmits across borders, impacting global markets and international businesses. In doing so, my research may help international institutions and multinational corporations better anticipate and mitigate risks associated with global economic volatility.
Aside from your research, what is the most exciting advancement in your field right now?
One of the most exciting advancements in corporate finance today is, unsurprisingly, the integration of artificial intelligence (AI) both into financial decision-making processes and into the finance researcher’s toolkit. On the latter front, I am particularly excited to see how these latest methodological advances can unlock novel insights from the vast quantity of data that firms and investors generate on an almost continuous basis. At the same time, I am excited to see how researchers can grapple with methodological issues of research replicability and the reliability of statistical inferences when incorporating these emerging technologies into our work.
What else would you like to share with this external university audience?
Beyond the specific details of my research, I’d love to emphasize that the questions we tackle in corporate finance, particularly those about uncertainty and corporate decision-making, are deeply connected to real-world challenges that impact everyone. Whether it’s a global crisis like the COVID-19 pandemic, events like Brexit, or innovations reshaping entire industries, understanding how companies adapt under uncertainty isn’t merely academic. It affects jobs, communities, and economies everywhere.
Is this research published anywhere yet? If so, please share a link.
My responses correspond to two papers on the topic of corporate decision-making under uncertainty.
One is co-authored with Murillo Campello (at the University of Florida & NBER) and Hyunseob Kim (at the Federal Reserve Bank of Chicago) and published in the Journal of Financial Economics in 2024.
The other is a 2025 working paper, co-authored with Kevin Aretz (at the University of Manchester), Murillo Campello (at the University of Florida & NBER), and Kevin Schneider (at the University of Cambridge).