Heterogeneous uncertainty matters! Evidence based on firms' cost management decisions

The literature traditionally treats the uncertainty firms encounter as a whole, neglecting the inherent heterogeneity of uncertainty that prevails in the real world. To address this critical issue, this study employs natural language processing methods to decompose uncertainty into three distinct levels: firm-level, industry-level, and macro-level uncertainty. We then examine the impact of heterogeneous uncertainty on corporate decision-making from a cost management perspective. Our findings indicate that while uncertainty as a whole increases cost stickiness, this effect mainly stems from firm-level uncertainty rather than industry-level and macro-level uncertainty. These findings suggest that firms only respond to uncertainty when they perceive uncertainty at the firm level. Cross-sectional tests indicate that the impact of uncertainty on cost stickiness is more pronounced when firms face higher adjustment costs, lower financing constraints, and lower competitive pressures than otherwise. Additionally, uncertainty diminishes firms' cost elasticity, curtailing their production flexibility. Collectively, our results provide insights into comprehending the internal mechanisms of firms' decision-making in the face of uncertainty.