Sentiment and firm behavior during the COVID-19 pandemic

Lukas Buchheim; Jonas Dovern; Carla Krolage; Sebastian Link

doi:10.1016/j.jebo.2022.01.011

Sentiment and firm behavior during the COVID-19 pandemic

J Econ Behav Organ. 2022 Mar:195:186-198. doi: 10.1016/j.jebo.2022.01.011. Epub 2022 Jan 20.

Authors

Lukas Buchheim¹, Jonas Dovern², Carla Krolage³, Sebastian Link⁴

Affiliations

¹ TU Dortmund and CESifo.
² Friedrich-Alexander-Universität Erlangen-Nürnberg and CESifo.
³ ifo Institute and LMU Munich.
⁴ ifo Institute, LMU Munich, IZA, and CESifo, Germany.

Abstract

How did optimism or pessimism about the duration of shutdowns during the COVID-19 pandemic affect firms' business outlook and behavior? In a large panel of German firms, we identify sentiment as the only plausible determinant of the cross-sectional variation in the expected shutdown length because this variation is uncorrelated with fundamentals. Firms incorporate this sentiment regarding the shutdown duration in their more general business outlook. Sentiment was also an important determinant of firms' crisis response: More pessimistic firms-those that perceived the shutdown to last longer-were more likely to implement strong measures like layoffs or canceling investments. The implementation of soft measures, e.g., working from home, was unrelated to the sentiment regarding the shutdown length.

Keywords: COVID-19; Employment; Firm behavior; Investment; Sentiment; Shutdown.