Does real flexibility help firms navigate the COVID-19 pandemic?
Tuan Ho,
Kirak Kim,
Yang Li and
Fangming Xu
The British Accounting Review, 2023, vol. 55, issue 4
Abstract:
Building on the investment-based asset pricing framework, we show that firms' ability to timely scale down their operations reduces the sensitivity of their equity value to large adverse productivity shocks. Using U.S. data in the times of the COVID-19 pandemic, we provide empirical evidence consistent with our model's predictions. Real flexibility curbs losses in firm value and reduces return volatility, especially for firms with high book-to-market or high COVID-19 exposure, consistent with the idea that the benefits of real flexibility are associated primarily with contraction options during the COVID-19 crisis. Our analysis shows that real flexibility provides incremental and complementary protection beyond financial flexibility. Besides its impact on stock prices, real flexibility also helps firms sustain earnings during 2020, compared with 2019 when the pandemic had not struck. Our work demonstrates that real flexibility is an important tool for corporate managers in navigating episodes of disasters.
Keywords: Real options; Flexibility; COVID-19; Price sensitivity; Resilience (search for similar items in EconPapers)
JEL-codes: G12 G31 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:55:y:2023:i:4:s0890838922000841
DOI: 10.1016/j.bar.2022.101148
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