Managerial Response to Macroeconomic Uncertainty: Implications for Firm Profitability

Abstract

This paper examines how agents’ response to macroeconomic uncertainty affects firms’ revenues, expenses, and profitability. Consistent with consumers reducing purchases and managers cutting costs, I find that increases in macroeconomic uncertainty lead to lower revenues and expenses. The net effect on profitability, however, is positive as the reduction in expenses exceeds the fall in revenues. The results last up to six quarters, vary predictably with countries’ institutional environment, and hold under instrumental variable estimation employing exogenous variation in macroeconomic uncertainty arising from natural disasters, political unrest, revolutions, and terrorist attacks.