Working Paper: CEPR ID: DP16145
Authors: Davide Pettenuzzo; Riccardo Sabbatucci; Allan Timmermann
Abstract: The outbreak of the Covid-19 pandemic massively increased uncertainty about firms' cash flows and access to financial markets. We examine its effect on firms' strategies for preserving cash by suspending dividends and share repurchase programs and raising new funds through bond and equity issues. Our estimates suggest that between March and December 2020 US firms saved a combined $86bn by suspending or reducing dividend payments and another $140bn from suspending buybacks. We identify a short list of firm and stock characteristics that explain most of the cross-sectional variation in firms' payout and financing decisions. We show that the expansive monetary policies pursued by the Federal Reserve in the early phase of the pandemic crucially affected the timing and sequencing of firms' decisions. Announcement effects on stock returns were highly unusual during the pandemic as dividend and buyback suspensions were associated with a more rapid recovery in firms' stock prices, consistent with investors interpreting them as prudent actions that helped reduce risks.
Keywords: COVID-19; pandemic; dividend suspensions; share repurchases; bond and equity issues; corporate actions; announcement effect on stock prices
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 pandemic (H12) | uncertainty about firms' cash flows (D25) |
| COVID-19 pandemic (H12) | access to financial markets (O16) |
| expansive monetary policies of the Federal Reserve (E52) | timing and sequencing of firms' decisions (D25) |
| COVID-19 pandemic (H12) | dividend and buyback suspensions (G35) |
| dividend and buyback suspensions (G35) | reduced cash flow risks (G32) |
| dividend and buyback suspensions (G35) | rapid recovery in stock prices (G17) |
| negative revenue growth (O49) | likelihood of suspending buybacks (G32) |