Governmental responses and firm resilience during the COVID-19 pandemic: The role of culture and politics

Using data from 180 countries and 24,833 publicly traded firms worldwide, this study examines how cultural and political factors influence the stringency of a government’s response to the COVID-19 pandemic and, in turn, the stock prices of firms and industries operating in a given country. Existing research demonstrates that government behavior during a pandemic can directly or indirectly affect stock prices. This study explores twelve political and cultural characteristics that might influence government policies. Interestingly, our results indicate that democratic and less long-term-oriented countries employ stricter responses to the pandemic. Furthermore, countries with higher individualism, coalition governments, and governments not battling for re-election appear to employ a smoothing strategy: although they implement stringent responses early on, they tend to react less aggressively when the number of COVID-19 cases increases. This study finds that increased stringency has a negative impact on corporate abnormal returns, especially during the early stages of the pandemic. Our study has important policy implications and offers valuable insights to investors: stock price reactions depend on political and cultural factors, industry, and firm characteristics. Most importantly, larger firms with more cash operating in collectivist and politically stable countries are more resilient.