Because firms are owned by risk-averse households, they exert more cognitive effort & make smaller input-choice mistakes in financial statements in aggregate downturns... macroeconomically attentive firms make smaller mistakes

Attention Cycles. Joel P. Flynn, Karthik A. Sastry. MIT, November 5, 2021. https://economics.mit.edu/files/20302

Abstract: Using data from US public firms’ regulatory filings and financial statements, we document that firms’ attention to macroeconomic conditions rises in downturns and that their propensity to make input-choice mistakes rises in booms. We explain these phenomena with a business-cycle model in which firms face a cognitive cost of making precise decisions. Because firms are owned by risk-averse households, there are greater incentives to deliver profits when aggregate consumption is low. Thus, firms exert more cognitive effort and make smaller input-choice mistakes in aggregate downturns. In the data, consistent with our model, financial markets punish mistakes more in downturns and macroeconomically attentive firms make smaller mistakes. When calibrated to match our firm-level evidence, attention cycles generate quantitatively significant asymmetric, state-dependent shock propagation and stochastic volatility of output growth.