Firm Policies and Uncertainty About Risk

This study examines how firm-specific financial policies and external factors influence the volatility of implied volatility (VOV), a measure of uncertainty about future risks. Using a sample of 6023 firms from January 2000 to December 2022, we derive VOV measures from IvyDB OptionMetrics and employ high-dynamic fixed-effect (HDFE) regressions to analyze the relationship between corporate debt ratios, working capital financing policies (WCFPs), and investor sentiment. Our findings reveal that aggressive debt policies increase VOV, while moderate WCFPs generate the highest uncertainty, indicating investor ambiguity regarding indecisive strategies. Additionally, high sentiment amplifies the effect of debt ratios on VOV, whereas moderate sentiment drives the influence of WCFPs. Industry dynamics, particularly in sectors like finance and manufacturing, further contribute to variations in VOV.