Using terrorist attacks and mass shootings as an exogenous source driving psychological changes in managerial sentiment, we explore the causal effect of managerial sentiment on firms' short‐term operating decisions. Employing cost stickiness to measure short‐term operating decisions on resource allocation and cost control, we find that firms located in the attacked metropolitan areas experience a significant decline in the degree of cost stickiness. We further find that the effect is more pronounced for firms that have inexperienced and less confident CEOs, when attack events are more salient, and when managers have lower prior exposure to negative events in their personal experiences. We also explore inventory management as another form of short‐term operating decisions and find that firms exhibit reduced asymmetric inventory management and a lower level of abnormal inventory holdings in postattack periods. Overall, our study suggests that shocks caused by exogenous negative events affect managerial sentiment, which in turn shapes managers' short‐term operating decisions.

This study investigates the association between managerial ability and cost rigidity. Cost rigidity refers to the relative proportion of fixed and variable costs. We expect that high‐ability managers will assess the potential upside congestion and downside default risks and choose an appropriate level of cost rigidity accordingly. Our results show that, on average, high‐ability managers tend to adopt a more rigid cost structure because they are more likely to realize favorable demand, and therefore, they retain higher capacity with more fixed inputs to alleviate potential congestion risk. We further document that firms with high‐ability managers will exhibit a higher (lower) level of cost rigidity when facing higher congestion risk (default risk). Our results are robust to using a propensity score matching method, a CEO turnover subsample, and alternative measures of cost rigidity and managerial ability. Taken together, this study suggests that firms' capacity management choices vary with the level of managerial ability.