Stanford University


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

J. Frank Li
Kyle Handley

National Bureau of Economic Research
October 2020

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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.

Stanford University