Operating Decisions in the Afterglow of an Unexpected Spike in Business Activities: Evidence from Banks’ Responses to Shale Boom

• In Event: Earnings Management and Forecasts and Operating Decisions

Abstract

Firms are required to make resource adjustments and product mix changes in response to an unexpected change in the operating environment. Despite the ubiquitous nature of such changes, little is known about the nature of such resource adjustments and product mix decisions when firms move from one steady state to another but face an intermediate period of uncertainty. Using shale oil and natural gas extraction as an exogenous positive economic shock to the operations of local banks, I find that banks reduce labor cost elasticity and increase labor employee elasticity in response to an unexpected positive change to their operating environment. Further, labor employee elasticity increases during the later periods of the shale development when there is lower uncertainty regarding the persistence of the positive economic shock. Banks with higher forecasting ability undertake labor adjustments earlier than banks with lower forecasting ability, highlighting the importance of the internal information environment in resolving uncertainty in the operating environment. During the later periods of the shale boom, banks reduce product diversity when their downside demand risk reduces reliably. Overall, results suggest that managers make dynamic adjustments to their operations in response to an unexpected change in the operating environment.

Author

• Hari Ramasubramanian, Frankfurt School of Finance and Management