Working Paper: CEPR ID: DP15224
Authors: Asli Demirgüç-Kunt; Balint Horvath; Harry Huizinga
Abstract: Using an event study methodology, this paper examines how European firms have been affected by the announcement of the Pandemic Emergency Purchase Program (PEPP) of the ECB. Firms with an investment-grade rating benefit relatively more as evidenced by higher share prices and lower CDS spreads, which reflects that the ECB is restricted to purchasing investment-grade corporate debt securities. The gains to shareholders relative to the total gains of shareholders and debtholders are negatively related to firm leverage, consistent with the existence of debt overhang. Firms more heavily impacted by the pandemic benefit relatively little from the PEPP, which could reflect that the business models of some of these firms are heavily damaged by the pandemic. Monetary policy in the form of the PEPP and national fiscal responses to the pandemic are shown to be complements in the sense that a strong pre-PEPP fiscal response enhances the potential for the PEPP to positively affect equity and debt valuations.
Keywords: quantitative easing; equity returns; pandemic
JEL Codes: E52; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| PEPP announcement (E60) | higher abnormal stock returns (G17) |
| PEPP announcement (E60) | lower CDS spreads (G19) |
| investment-grade rating (G24) | greater impact from PEPP (F69) |
| higher leverage (G32) | smaller gains in shareholder value (G34) |
| heavily impacted by pandemic (F69) | benefit less from PEPP (H55) |
| stronger national fiscal responses (H69) | enhanced efficacy of PEPP (C92) |