Preparing for a Rainy Day: Firm Capital and Novel Risk

Abstract

Many organizations face novel risks. Novel risks are unforeseen, hard to manage, and, despite the challenges in preparing for and managing them, surprisingly understudied in academia. This paper uses the unexpected COVID-19 pandemic as a setting to examine how organizations can build firm capital to prepare for novel risks. We define four types of firm capital: (1) financial, (2) human, (3) organizational, and (4) industrial. Our findings show that firms with more of these four pre-crisis capital types prior to the pandemic have better stock performance. Therefore, our paper provides important managerial implication for firms that want lower adverse consequences from future novel risk events.