Working Paper: CEPR ID: DP14773
Authors: Josef Zechner; Marco Pagano; Christian Wagner
Abstract: This paper investigates whether the stock market prices the effect of social dis-tancing on firms' operations. We document that firms that are more resilient tosocial distancing signifcantly outperformed those with lower resilience duringthe COVID-19 outbreak, even after controlling for the standard risk factors.Similar cross-sectional return differentials already emerged before the COVID-19 crisis: the 2014-19 cumulative return differential between more and lessresilient firms is of similar size as during the outbreak, suggesting growingawareness of pandemic risk well in advance of its materialization. Finally, weuse stock option prices to infer the market's return expectations after the onsetof the pandemic: even at a two-year horizon, stocks of more pandemic-resilientfirms are expected to yield signifcantly lower returns than less resilient ones,reflecting their lower exposure to disaster risk. Hence, going forward, marketsappear to price exposure to a new risk factor, namely, pandemic risk.
Keywords: asset pricing; rare disasters; social distance; resilience; pandemics
JEL Codes: G01; G11; G12; G13; G14; Q51; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firm resilience to social distancing (H32) | Stock performance (G17) |
| Prior learning about disaster risk (H84) | Stock return differentials (G19) |
| Stock option prices imply market expectations (G13) | Lower returns from more resilient firms post-pandemic (G17) |