Risk Shocks, Uncertainty Shocks, and Corporate Policies

55 Pages Posted: 15 Dec 2014 Last revised: 30 Jun 2015

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Minwen Li

Tsinghua Universitiy - School of Economics and Management

Hao Wang

Tsinghua University

Date Written: December 4, 2014

Abstract

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

Avramov, Doron and Li, Minwen and Wang, Hao, Risk Shocks, Uncertainty Shocks, and Corporate Policies (December 4, 2014). Available at SSRN: https://ssrn.com/abstract=2538287 or http://dx.doi.org/10.2139/ssrn.2538287

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

HOME PAGE: http://faculty.idc.ac.il/davramov/

Minwen Li (Contact Author)

Tsinghua Universitiy - School of Economics and Management ( email )

324 Weilun Building
nagement
Beijing, 100084
China
(86)10-62793685 (Phone)

Hao Wang

Tsinghua University ( email )

318 Weilun Building
Tsinghua University
Beijing, 100084
China
86 10 62797482 (Phone)
86 10 62794554 (Fax)

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