How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis

By Rudi Fahlenbrach, Kevin Rageth, René M. Stulz. The Review of financial studies, 2020

518 citations recorded by the source corpus.

Abstract Firms with greater financial flexibility should be better able to fund a revenue shortfall resulting from the COVID-19 shock and benefit less from policy responses. We find that firms with high financial flexibility within an industry experience a stock price drop that is 26%, or 9.7 percentage points, lower than those with low financial flexibility. This differential return persists as stock prices rebound. Firms more exposed to the COVID-19 shock benefit more from cash holdings. No evidence suggests that recent payouts worsened the average firm’s drop in stock price. Our results cannot be explained by a leverage effect.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/09ec3165dec3e75dfa2e857dffd80f4333609371

Citations in the corpus

• Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets (2020, unknown): “Fahlenbrach et al. (2020) look at stock-price reactions for firms in different industries and compare those in highly affected industries to those in less affected industries.”
• ESG Ratings and Stock Performance during the COVID-19 Crisis (2021, unknown): “We also employ several control variables which have also been used in the existing literature [9,10,12,16] and provide definitions of these variables in Table A1 in the Appendix A.”
• When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response (2020, unknown): “Chen, Goldstein, and Jiang (2010), Falato et al. (forthcoming), and Goldstein, Jiang, and Ng (2017) provide theory and evidence of these forces before the recent episode. Consistent with this view, Falato, Goldstein, and Hortaçsu (2020) and Ma, Xiao, and Zeng (2020) document large redemptions from b”
• Can the Covid Bailouts Save the Economy? (2020, unknown): “Fahlenbrach, Rageth, and Stulz (2020) show that firms that had better liquidity buffers before the pandemic showed smaller stock market declines.”
• Investor rewards to environmental responsibility: Evidence from the COVID-19 crisis (2021, unknown): “The economic significance of the environmental score in explaining the cross-section of returns represents respectively 52% of the economic significance of cash holdings and 75% of the economic significance of long-term debt, which are two well-established determinants of the cross-section of return”
• How Did COVID-19 Affect Firms’ Access to Public Capital Markets? (2020, unknown): “Fahlenbrach et al. (2020) analyze the effects of financial flexibility on stock prices during the COVID-19 crisis.”
• Corporate immunity to the COVID-19 pandemic (2020, unknown): “804 gies employed by hedge funds and their reliance on leverage can contribute to sharp, nonfundamental price movements in response to adverse shocks and with research by Pastor and Vorsatz (2020) and Glossner et al. (2020) , who show that US actively managed funds have underperformed during the pan”
• Consumer Spending Responses to the COVID-19 Pandemic: An Assessment of Great Britain (2020, unknown): “Finally, Fahlenbrach et al (2020) stock price and credit risk reactions to COVID-19.”
• Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash (2020, unknown): “Similar evidence is also provided by Fahlenbrach, Rageth, and Stulz (2020).”
• The impact of the COVID-19 pandemic on business expectations (2021, unknown): “Alfaro, Chari, Greenland, and Schott (2020) and Fahlenbrach, Rageth, and Stulz (2020) find similar results.”