Uncertainty Shocks and Corporate Policies

68 Pages Posted: 17 Aug 2020

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: July 15, 2020

Abstract

We develop a firm-level measure of uncertainty shocks through textual analysis of firm annual reports. We find that uncertainty shocks are followed by a short-term reduction in leverage and dividend payouts, while investment, employment, and cash holdings remain unchanged. In contrast, text-based first-moment shocks are followed by long-lasting diminishing leverage, investment, employment, dividend payouts, and stock repurchases, and increasing cash holdings. Small, non-profitable, and high credit risk firms are more responsive to uncertainty and first-moment shocks. Overall, first-moment shocks trigger persistent policy adjustments, while managers adopt a "wait-and-see" strategy until uncertainty resolves. The evidence is robust to various considerations.

Keywords: uncertainty shocks, first-moment shocks, leverage, investment, employment, payouts, cash holdings

JEL Classification: G

Suggested Citation

Avramov, Doron and Li, Minwen and Wang, Hao, Uncertainty Shocks and Corporate Policies (July 15, 2020). Available at SSRN: https://ssrn.com/abstract=3652560 or http://dx.doi.org/10.2139/ssrn.3652560

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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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