The Long Shadow beyond Lockdown: Board Chairs’ Professional Epidemic Experience and Corporate Investment

Based on the evidence after the outbreak of SARS in 2003, which is caused by the same family of viruses as COVID-19, we show that due to the “probability weighting” phenomenon, i.e., decision makers tend to overweight the probability of extreme tail events, the epidemic experience induces entrepreneurs to undervalue profitable investment projects. In particular, we show that firms with board chairs experienced the outbreak of SARS during their tenure of high executives invest less in subsequent periods. Among those firms, this effect matter more for board chairs that actually experienced operating distress during the outbreak of SARS. In addition, those firms have lower investment-Q sensitivities and worse performances, implying that the reduction in corporate investment is inefficient. Our paper reveals a specific channel through which epidemic disease can distort the real economy, which has useful implications for assessing the long-run economic impacts of COVID-19.