Risk Shocks, Uncertainty Shocks, and Corporate Policies
55 Pages Posted: 15 Dec 2014 Last revised: 30 Jun 2015
Date Written: December 4, 2014
We originate risk and uncertainty shock measures through textual analysis of corporate annual reports and assess their implications for corporate policies. Risk shocks are followed by long-lasting diminishing leverage, investment, employment, dividend payouts, stock repurchases, and increasing cash holdings, with small, high credit risk, and non-profitable firms displaying stronger effects. As risk diminishes, firms need not reverse cash holdings and payouts. Uncertainty shocks are followed by a short-term reduction in leverage, while other corporate policies remain unchanged. Overall, risk shocks trigger persistent policy adjustments, while managers adopt a "wait-and-see" strategy until uncertainty resolves. The evidence is robust to various considerations.
Keywords: risk, uncertainty, leverage, investment, employment, payoutS, cash holdings, textual analysis
JEL Classification: G03
Suggested Citation: Suggested Citation