Working Paper: NBER ID: w27106
Authors: Rüdiger Fahlenbrach; Kevin Rageth; René M. Stulz
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 experience a stock price drop lower by 26% or 9.7 percentage points than those with low financial flexibility accounting for a firm’s industry. This differential return persists as stock prices rebound. Similar results hold for CDS spreads. The stock price of a firm with an average payout over assets ratio would have dropped 2 percentage points less with no payouts for the last three years.
Keywords: financial flexibility; COVID-19; stock price; credit risk; revenue shock
JEL Codes: G01; G14; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial flexibility (G32) | stock price drop (G19) |
| financial flexibility (G32) | credit default swap (CDS) premiums (G22) |
| lower short-term debt, more cash, less long-term debt (G32) | stock price drop (G19) |
| long-term debt to assets ratio (G32) | performance (D29) |
| financial flexibility (G32) | firm value (G32) |