How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis

The risk of being a fallen angel and the corporate dash for cash in the midst of COVID

Ruediger Fahlenbrach, Kevin Rageth and René M Stulz

The Review of Financial Studies, 2021, vol. 34, issue 11, 5474-5521

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 within an industry experience a stock price drop that is 26, or 9.7 percentage points, lower than those with low financial flexibility. This differential return persists as stock prices rebound. Firms more exposed to the COVID-19 shock benefit more from cash holdings. No evidence suggests that recent payouts worsened the average firm’s drop in stock price. Our results cannot be explained by a leverage effect.

JEL-codes: G01 G14 G35 G38 (search for similar items in EconPapers)
Date: 2021
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Working Paper: How Valuable is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis (2020)
Working Paper: How Valuable Is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis (2020)
Working Paper: How Valuable is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis (2020)
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