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

Kyle Handley and J. Frank Li

No 27896, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D81 E22 E32 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-bec and nep-mac
Note: CF EFG PR
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