Outbreak of epidemic diseases and stock returns: an event study of emerging economy

The massive contagion diseases such as COVID-19 amongst others, has affected nearly all the economies and business concerns that leads to substantial decline in the cashflows and returns dynamics. Considering the same, this paper intends to investigate the impact of outbreak of epidemic diseases on the stock return (observed through cumulative average abnormal return (CAAR)) for the listed banks in Pakistan from 2011 to 2020. Event study method was employed and five days pre and ten days post event of each disease were observed as an event window. The results confirm that none of the epidemic disease outbreak significantly determines the CAAR for all listed banks, except COVID-19 and Dengue Fever during the event day. There is a negative and significant impact of COVID-19 on the stock returns for all the banks in Pakistan from the event day to day eight except day seven. More specifically, COVID-19 is found to be a significant indicator for the stock returns of private banks. However, in case of public listed banks, only the outbreak of HIV cases possesses significant and positive impact on CAAR at the day of event. These findings would guide all stakeholders such as investors, financial analysts, regulators, and chief risk officers specifically in banks to make strategic decisions while analyzing the relationship between epidemic outbreaks and stock returns.