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 fundamen-tals. Firms incorporate this sentiment regarding the shutdown duration in their more gen-eral business outlook. Sentiment was also an important determinant of firms' crisis re-sponse: More pessimistic firms-those that perceived the shutdown to last longer-were more likely to implement strong measures like layoffs or canceling investments. The im-plementation of soft measures, e.g., working from home, was unrelated to the sentiment regarding the shutdown length. (c) 2022 Elsevier B.V. All rights reserved.