NBER WORKING PAPER SERIES THE GLOBAL IMPACT OF BREXIT UNCERTAINTY

We propose a text-based method for measuring and analyzing the international propagation of uncertainty shocks at the firm level. We apply this method to estimate the impact of Brexitrelated uncertainty and find widespread reverberations on listed firms in 81 countries. International firms most exposed to Brexit uncertainty not only significantly lost market value but also reduced hiring and investments. In addition to Brexit uncertainty (the second moment), we find that international firms overwhelmingly expected negative direct effects from Brexit (the first moment). Most prominently, firms expected difficulties from regulatory divergence, reduced labor mobility, and limited trade access. Tarek Alexander Hassan Department of Economics Boston University 270 Bay State Road Boston, MA 02215 and NBER thassan@bu.edu Stephan Hollander Tilburg University Warandelaan 2 5037 AB Tilburg the Netherlands s.hollander@tilburguniversity.edu Laurence van Lent Frankfurt School of Finance and Management Adickesallee 32-34 60322 Frankfurt am Main Germany l.vanlent@fs.de Ahmed Tahoun London Business School 26 Sussex plc, Regent's Park NW1 4SA London atahoun@london.edu Brexit, the UK’s momentous decision to leave the European Union, exemplifies how political and economic shocks originating in one country can propagate to affect firms in other countries and across the globe. How exactly these shocks percolate through the world economy is, however, an open question, not the least to policy makers and politicians struggling to find an appropriate response. Hampering a systematic examination of the impact of events such as Brexit is the challenge of measuring the extent to which individual firms are exposed to specific shocks. Our proposal is to glean such a measure from transcripts of discussions during earnings conference calls between firms’ management and financial analysts when they talk about Brexit, or any other specific shock (e.g., the Fuskushima nuclear disaster, studied later in the paper). We demonstrate how a text-based approach can simultaneously capture a given firm’s exposure to the shock and provide a way to decompose measured exposure into expected costs, benefits, and risks as assessed by the firm’s management and its analysts. We then illustrate our method with a comprehensive empirical analysis of how US and international firms respond to the Brexit referendum shock, and provide first evidence of the global repercussions of Brexit uncertainty. A growing body of work uses structural models and detailed micro data to estimate the direct and indirect effects of Brexit on UK-based firms (e.g., Sampson, 2017; Graziano et al., 2018; Bloom et al., 2019; Broadbent et al., 2019). However, attempts to quantify the effect on and responses of firms outside the UK have proven more complicated. Indeed, the exposure of international firms (i.e., firms not located in the UK) to Brexit—and more generally the cross-border impact of any shock—is hard to measure for at least three reasons. First, international exposures can come from many potentially interdependent sources, including barriers to product market access, frictions in managing relationships with customers, suppliers, or subsidiaries, and hurdles in expanding business. This means that any attempt to Witness, for example, President Macron’s comment that he would rather have a “no-deal” Brexit than continued uncertainty troubling the French economy (Waterfield et al., 2019). Other papers documenting a negative impact of Brexit on UK investments, employment, wages, trade, lending, and competition include Born et al. (2019); Berg et al. (2019); Van Reenen (2016); Breinlich et al. (2018); Davies and Studnicka (2018); Dhingra et al. (2017); Garetto et al. (2019); Costa et al. (2019); McGrattan and Waddle (2017); Steinberg (2019).