Abstract
Economists have long theorized that sentiments, or spontaneous beliefs that are unjustified by economic fundamentals, are a driver of economic behaviours. In this study, I explore whether such sentiments influenced firms’ behaviours during the COVID-19 outbreak. Using a sample of Italian firms, I observe that in the immediate aftermath of the outbreak, firms’ expectations about post-COVID economic recovery largely reflected beliefs unexplained by firms’ COVID-related experiences. Then, I find that these beliefs were associated with firms' labour market behaviours. Firms that displayed more pessimistic beliefs were more likely to implement cost-cutting labour market measures such as dismissing employees and reducing work hours.