Finance Seminar（2015-07）

Topic:Risk Shocks, Uncertainty Shocks, and Corporate Policies

Speaker:Minwen Li, Tsinghua University

Time:Wednesday, 1 April, 10:30-11:50

Location:Room 217, Guanghua Building 2

Abstract：We originate risk and uncertainty shock measures through textual analysis of corporate annual reports. Conceptually, risk shocks are associated with undesirable outcomes with conceivable probability assignment, while uncertainty shocks pertain to ambiguous outlook. We show that risk and uncertainty shocks carry very different implications for corporate policy. Risk shocks are followed by long-lasting diminishing leverage, investment, employment, dividend payouts, and increasing cash holdings, with small high credit risk firms displaying stronger effects. When the risk resolves, firms do not essentially reverse their cash holding and payout policies. Uncertainty shocks, on the other hand, are only followed by a short-term reduction in leverage, while other corporate policies remain virtually unchanged. Overall, risk shocks trigger persistent policy adjustments, while managers adopt a "wait-and-see" strategy until uncertainty resolves.