Measuring the Effects of Firm Uncertainty on Economic Activity: New Evidence from One Million Documents

63 Pages Posted: 7 Oct 2020

See all articles by Kyle Handley

Kyle Handley

University of Michigan, Stephen M. Ross School of Business

J. Frank Li

Stanford University

Date Written: October 2020

Abstract

We construct a new measure of firm-level uncertainty from analyzing the text of mandatory reports filed with the U.S. Securities and Exchange Commission. Using firm and establishment level panel data on investment margins and employment dynamics, we find our uncertainty measure has large effects on investment even after controlling for industry and time-varying shocks. Periods of high firm uncertainty (1) reduce investment rates by 0.5% and attenuate the response to positive sales shocks by about half and (2) reduce employment growth rates by 1.4% and the response to positive sales shocks by 30%. Firms are less responsive to demand shocks at the firm level and across establishments within the firm. Consistent with “wait and see” dynamics, uncertainty affects new investment activity, e.g. plant births and acquisition, more than disinvestment margins.

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Suggested Citation

Handley, Kyle and Li, J. Frank, Measuring the Effects of Firm Uncertainty on Economic Activity: New Evidence from One Million Documents (October 2020). NBER Working Paper No. w27896, Available at SSRN: https://ssrn.com/abstract=3705107

Kyle Handley (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

J. Frank Li

Stanford University

Stanford, CA 94305
United States

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