Manager Uncertainty and Cross-Sectional Stock Returns

This paper evidences the explanatory power of managersâ uncertainty for cross-sectional stock returns. I introduce a novel measure of the degree of managersâ uncertain beliefs about future states: manager uncertainty (MU), defined as the count of the word âuncertaintyâ over the sum of the count of the word âuncertaintyâ and the count of the word âriskâ in filings and conference calls. I find that managerâs level of uncertainty reveals valuation information about real options and thereby has significantly negative explanatory power for cross-sectional stock returns. Beyond existing market-based uncertainty measures, the manager uncertainty measure has incremental pricing power by capturing information frictions between managersâ reported uncertainty and investorsâ perception of uncertainty. Moreover, a short-long portfolio sorted by manager uncertainty has a significantly positive premium and cannot be spanned by existing factor models. An application on COVID-19 uncertainty shows consistent results.