Managing uncertainty under sudden operational closures: The role of implied volatility, positive sentiment, and productivity

Using the literature on epistemic and aleatory uncertainty and the theoretical framework on ‘protecting the core,’ we evaluate the impact of sudden operational closures under implied volatility, a revealed uncertainty, on stock market reaction. We propose three hypotheses about the relationship between implied volatility and firm performance under the positive sentiment and Total Factor Productivity (TFP). We use a comprehensive event study methodology to test the proposed hypotheses. We draw on Capital IQ’s Key Development database, which provides operational closure events. Further, we merge the operations closures events with the Compustat data to obtain a sample of 1,501 US manufacturing firms with 10,883 events between 2002 and 2019. Though implied volatility is not significantly related to market performance, the relationship of implied volatility with a firm’s market performance is strengthened by positive sentiment and TFP. The findings have implications for operations managers aiming to manage revealed uncertainty. This paper is the first attempt at empirically evaluating uncertainty management strategies under uncertainty conditions characterized by an environment of high implied volatility. The suspension of primary corporate operations reflects disruptions that must be carefully managed to improve business performance.