Forecast disagreement about firm-level profitability and uncertainty

Abstract

This paper proposes a measure for firm-level uncertainty using forecast disagreement among financial analysts in South Korea for the period between 2003Q1 and 2019Q4. I find that, at the aggregate level, the disagreement measure of uncertainty is positively correlated with the Economic Policy Uncertainty (EPU) and negatively correlated with GDP growth, both with lags. To investigate the real option channel of uncertainty, the impact of firm-level uncertainty on investment is estimated, controlling for firm-level first-moment shocks and financial conditions. The results suggest that the firm-level disagreement measure of uncertainty adversely affects investment and such effects are more severe for firms with high levels of irreversible investments. There is empirical evidence suggesting that the impacts on other real activities are consistent with the real option theory — sales, employment, and investment in R&D are discouraged by uncertainty shocks. Financial decisions of firms are affected by firm-level uncertainty shocks — firms reduce debt and increase payout when faced with higher uncertainty.