Uncertainty Shocks and Corporate Policies

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.