Terrorist Attacks, Managerial Sentiment, and Corporate Policies

Abstract

Extreme negative events adversely influence people’s sentiment and induce pessimism in risk assessments in unrelated domains. Motivated by this finding, we examine whether managers of firms located in close proximity to terrorist attacks and mass shootings become more pessimistic and choose more conservative corporate policies. Using firm-level sentiment data, we first demonstrate that managers located closer to these negative events become more pessimistic. Then, we show that local managers temporarily reduce R&D expenditure and long-term leverage and increase cash holdings around the periods of terrorist attacks. The impact of negative events on corporate policies becomes weaker as the firm-event distance increases. Further, events with greater media coverage induce larger shifts in corporate policies and the impact is more pronounced among firms with younger CEOs. Collectively, these findings suggest that shocks induced by exogenous and economically irrelevant negative events affect managerial sentiment and corporate policies.

Keywords: Terrorist attacks, mass shootings, managerial sentiment, corporate policies, media coverage, firm location.

JEL Classification: G02, G32.