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How did optimism or pessimism about the duration of shutdowns during the COVID-19 pandemic affect firms’ business outlook and behavior? In a large panel of German firms, we identify sentiment as the only plausible determinant of the cross-sectional variation in the expected shutdown length because this variation is uncorrelated with fundamentals. Firms incorporate this sentiment regarding the shutdown duration in their more general business outlook. Sentiment was also an important determinant of firms’ crisis response: More pessimistic firms—those 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 sentiment regarding the shutdown length.

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.