Sentiment and firm behavior during the COVID-19 pandemic

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.