Managerial Response to Macroeconomic Uncertainty: Implications for Firm Profitability

Forthcoming in The Accounting Review

51 Pages Posted: 20 May 2020 Last revised: 5 Apr 2023

See all articles by Oliver Binz

Oliver Binz

ESMT European School of Management and Technology

Date Written: May 2, 2020

Abstract

This paper examines how agents’ response to macroeconomic uncertainty affects firms’ revenues, expenses, and profitability in a global sample of firms spanning 1997 to 2018. Consistent with consumers reducing purchases and managers cutting costs, I find that increases in macroeconomic uncertainty lead to both lower revenues and lower expenses. The net short-term effect on profitability is positive as the reduction in expenses exceeds the fall in revenues. This favorable profitability effect is attenuated for firms whose institutional environment restrains cost-cutting, holds for both the cash and accrual components of earnings, and is robust to instrumental variable estimation employing exogenous variation in macroeconomic uncertainty arising from natural disasters, political unrest, revolutions, and terrorist attacks.

Keywords: Macroeconomic Uncertainty, Consumption, Investment, Firm Profitability

JEL Classification: E22, D81, M41

Suggested Citation

Binz, Oliver, Managerial Response to Macroeconomic Uncertainty: Implications for Firm Profitability (May 2, 2020). Forthcoming in The Accounting Review, Available at SSRN: https://ssrn.com/abstract=3591050 or http://dx.doi.org/10.2139/ssrn.3591050

Oliver Binz (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

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