Managerial Sentiment and Cost Stickiness: Evidence from Terrorist Attacks

Abstract

Using terrorist attacks as an exogenous source driving psychological changes in managerial sentiment, we explore the causal effect of managerial sentiment on firms’ cost stickiness. We find that firms located in the attacked metropolitan areas experience a significant decline in cost stickiness for the first two fiscal quarters after the terrorist attack. We further find that the effect is more pronounced for firms with inexperienced, less confident and short-horizon CEOs, as well as when attack events are more salient and managers have limited prior exposure to negative events. Our main findings are robust to a variety of additional tests. Overall, our study suggests that shocks induced by exogenous negative events affect managerial sentiment, which in turn shapes managers’ real operating decisions.

Keywords: terrorist attacks; managerial sentiment; real effect; cost stickiness