How Valuable is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis

Ruediger Fahlenbrach, Kevin Rageth and René M. Stulz
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Kevin Rageth: UEcole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
René M. Stulz: Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

No 20-37, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The COVID-19 shock creates a sudden temporary sharp shortfall in revenue for firms. We expect firms with greater financial flexibility to be better able to fund themselves in the presence of a revenue shortfall and to benefit less from the news concerning policy responses to the crisis on March 24. We show that firms with less financial flexibility experience worse stock returns until March 23 and benefit more from the news on March 24. Specifically, 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. Similar results hold for CDS spreads. Had firms not made payouts over the last three years, the stock price drop for a firm with an average payout over assets ratio would have been lower by less than 2 percentage points. If firms in the top quartile of payouts over assets for the last three years did not have payouts over that period, they could, on average, have repaid all their long-term debt and their stock price drop would have been lower by 5.1 percentage points. Existing measures of financial constraints are not helpful in explaining the reaction of firms to the shock.

Keywords: COVID-19; financial flexibility; cash holdings; leverage; short-term debt; stock returns; CDS premiums (search for similar items in EconPapers)
JEL-codes: G01 G14 G32 G35 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2020-05
New Economics Papers: this item is included in nep-cfn
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Related works:
Journal Article: How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis (2021)
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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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2037

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