Work in Progress

Policy Uncertainty, Financial Constraints and Investment [Job Market Paper]

Exploiting textual information for a large panel of U.S. firms, I study the sensitivity of corporate investment rates to economic policy uncertainty. I find that a doubling of economic policy uncertainty reduces capital expenditure by 25%. R&D does not respond to policy uncertainty once industry-specific shocks are controlled for. Firms might have little reason to delay R&D projects when policy uncertainty idiosyncratically increases because this could make them loose the race for new discoveries against their competitors. Investigating the channels through which policy uncertainty affects investment, I find the sensitivity of investment to policy uncertainty to be significantly amplified for firms that are likely to be financially constrained ex-ante. The key to understanding the relation between investment and policy uncertainty thus seems to lie in the interaction of policy uncertainty with financial frictions.

Entrepreneurial Optimism and Creative Destruction


We model the implications of entrepreneurial optimism under uncertainty in strategic situations of entry and competition. Using automatic text-analysis on specific sections of US annual reports, we show that young companies face uncertainty, rather than risk and that they are excessively optimistic in their forward looking statements. Under uncertainty, optimistic entrepreneurs enter markets where expected profit maximizers would not enter, providing a rationale for our empirical findings. In competition, optimism under uncertainty helps entrepreneurs to act more boldly and achieve higher profits. Sometimes only optimistic, but not too optimistic, entrepreneurs can thus profitably enter a market to their and societies' benefit as whole.


Risk and Ambiguity in 10-Ks: An Examination of Cash Holding and Derivatives Use


We explore the role of ambiguity, as opposed to risk, in explaining firms' corporate financial policies. We create text based measures of ambiguity and risk for U.S. firms between 1995 and 2013. Measured ambiguity is high in for instance high tech industries, whereas the risk measure is high for homogeneous goods. Using within-firm variation to identify effects we find that greater ambiguity is associated with greater cash holdings and more risk with a higher probability of derivatives use. The results are in line with a simple model of liquidity management with ambiguity averse agents.