Firm-Level Trade Policy Uncertainty and Cost Stickiness: Evidence From a Large Language Model Approach

This study investigates how managers' perceived trade policy uncertainty (TPU) affects firms' cost management decisions. Adopting a firm-level TPU measure developed by a large language model, our analysis reveals that TPU reduces cost stickiness. This effect is more pronounced in firms managed by non-overconfident, risk-averse, or high-ability executives. Our results hold when we employ a series of endogeneity tests, including a coarsened exact matching method, a difference-in-difference approach, and an instrumental variable approach. Finally, we find that firms' cost management decisions resulting from pessimistic expectations about future sales have significant implications for firm performance.