Firm-level Expectations and Behavior in Response to Covid-19

How did sentiment about the policies for containing the COVID-19 pandemic affect firms' business outlook and behavior early in the crisis? In a representative panel of German firms, we demonstrate that the variation in expectations regarding the duration of COVID-19 induced lockdowns plausibly reflects sentiment that is unrelated to fundamentals. This sentiment-driven variation in expectations was an important determinant of firms' crisis response: Firms that perceived the shutdown to last longer were more likely to implement strong measures like layoffs or canceling investments. The implementation of soft measures, e.g., working from home, was unrelated to the expected crisis progression.