The Global Impact of Brexit Uncertainty

Using tools from computational linguistics, we propose a text-based method for isolating first and second moment exposures to shocks stemming from specific events at the firm level. Applying this method, we construct new measures of the impact of Brexit on listed firms in the United States and around the world: the proportion of discussions in quarterly earnings conference calls on the costs, benefits, and risks associated with the UK's decision to leave the EU. We identify which firms expect to gain or lose from Brexit and which are most affected by Brexit uncertainty. We then estimate effects of the different types of Brexit exposure on firm-level outcomes. We find that the impact of Brexit-related uncertainty extends far beyond British or even European firms; US and international firms most exposed to Brexit uncertainty lost a substantial fraction of their market value and have also reduced hiring and investment. In addition to Brexit uncertainty (the second moment), we find that international firms overwhelmingly expect negative direct effects from Brexit (the first moment) when it comes to pass. Most prominently, firms expect difficulties from regulatory divergence, reduced labor mobility, limited trade access, and the costs of post-Brexit operational adjustments. Consistent with the predictions of canonical theory, this negative sentiment is recognized and priced in stock markets but has not yet significantly affected firm actions.