Working Paper: NBER ID: w29526
Authors: Tarek Alexander Hassan; Jesse Schreger; Markus Schwedeler; Ahmed Tahoun
Abstract: We use textual analysis of earnings conference calls held by listed firms around the world to measure the amount of risk managers and investors at each firm associate with each country at each point in time. Flexibly aggregating this firm-country-quarter-level data allows us to systematically identify spikes in perceived country risk (“crises”) and document their source and pattern of transmission to foreign firms. While this pattern usually follows a gravity structure, it often changes dramatically during crises. For example, while crises originating in developed countries propagate disproportionately to foreign financial firms, emerging market crises transmit less financially and more to traditionally exposed countries. We apply our measures to show that (i) elevated perceptions of a country's riskiness, particularly those of foreign and financial firms, are associated with significant falls in local asset prices, capital outflows, and reductions in firm-level investment and employment. (ii) Risk transmitted from foreign countries affects the investment decisions of domestic firms. (iii) Heterogeneous currency loadings on perceived global risk can help explain the cross-country pattern of interest rates and currency risk premia.
Keywords: Country Risk; Financial Contagion; Capital Flows; Investment Decisions; Natural Language Processing
JEL Codes: D21; F23; F30; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elevated perceptions of a country's riskiness (F34) | declines in local asset prices (G19) |
| elevated perceptions of a country's riskiness (F34) | capital outflows (F32) |
| elevated perceptions of a country's riskiness (F34) | reductions in firm-level investment (D25) |
| elevated perceptions of a country's riskiness (F34) | reductions in employment (J63) |
| foreign risk perception (F52) | local investment behavior (G40) |
| heterogeneous currency loadings on perceived global risk (F31) | variations in interest rates (E43) |
| heterogeneous currency loadings on perceived global risk (F31) | currency risk premia (F31) |
| one standard deviation increase in a country's perceived riskiness (F65) | 47% reduction in capital inflows (F32) |