Abstract
Utilizing a unique firm-level survey in Japan that contains five-bin forecasts for sales, we document three findings. First, firm-level subjective uncertainty is highly and positively related to volatility of past firm growth. Second, there are substantial variations in subjective uncertainty across firms, with a long right tail with extremely high subjective uncertainty. In addition, firms that have exposure to international businesses either through international trade or foreign direct investment have both higher average expected sales and subjective uncertainty. Finally, the sudden escalation of the COVID-19 pandemic in January–February 2020 led to a substantial increase in firms’ subjective uncertainty. Our triple-difference estimation results show that this effect is especially large for firms that have direct exposure to China through international trade and foreign direct investment.
Highlights
A growing literature has highlighted the role of uncertainty shocks in slowing down business activities like hiring and investment
We investigate how business expectations and uncertainty changed after the initial outbreak of COVID-19 in China starting in January 2020 when the second wave of the survey was being collected
Exploiting heterogeneity among firms when each firm responded to the survey, we provide causal evidence in that the sudden outbreak of the COVID-19 pandemic in China increased firms’ subjective uncertainty, with the impact being more pronounced among firms that have transaction relationships with China
Summary
A growing literature has highlighted the role of uncertainty shocks in slowing down business activities like hiring and investment. We elicit five-bin subjective probability distributions about future sales to construct a measure of firms’ expectations and uncertainty With this measure, we investigate how business expectations and uncertainty changed after the initial outbreak of COVID-19 in China starting in January 2020 when the second wave of the survey was being collected. Firms that have a business relationship with China may be hit by such information shocks harder, because COVID-19 had not yet begun to affect the Japanese economy by mid-February when our survey ended. Our DDD estimation reveals that uncertainty increased among the treated firms from 2017 to 2020, compared with firms that answered the survey after the escalation of the COVID-19 pandemic but with no business relationship with China.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
