Firm-level shock exposures, stock returns, and real outcomes: a text-analytic approach

We introduce a firm-level exposure to macroeconomic shocks derived from 10K Risk Factors’ ability to predict shock-related market surprises and illustrate its application to COVID-19. It has significant explanatory power for returns in- and out-of-sample; contains all relevant information for future real outcomes present in surprises; and can be decomposed into interpretable word groupings that collectively account for real outcomes. These highlight numerous specific channels through which COVID-19 generated negative and positive real effects, and how these are distributed across firms. By reflecting information on trading partners, technology adoption, and business models, text explains how COVID-19 created long-lasting firm heterogeneity.