Stock Market Reactions to COVID-19 Announcement: Developed Versus Emerging Markets and Large Versus Small Firms

Research Question: How do stock markets around the world react to the World Health Organization (WHO)’s announcement on 11 March 2020 declaring COVID-19 as a global pandemic? Are there any differences in the reaction between developed and emerging markets? Are there any differences in the reaction between large and small firms? Motivation: There is a need to have a better understanding on whether different markets react differently to COVID-19 announcement. It is also important to know what factors make some markets more resilient than others. Idea: We envisage that developed markets, large firms, large stock markets, and markets with international exposure would demonstrate greater degree of resiliency than their respective counterparts. The results of this study would have profound implications on the ability of markets to withstand against global pandemic such as the COVID-19. Data: The sample consists of 30 world’s largest stock markets based on their market capitalization on 31 December 2019, consisting of 18 developed markets and 12 emerging markets. For each market, we collect two indices: the main index representing large firms and the small-firm index representing small firms. Method/Tools: This is an event study using the market model and market-adjusted model to estimate abnormal returns. We then use the OLS and feasible GLS for cross-sectional regression analysis of the CARs. Findings: This study finds that the WHO’s pandemic announcement negatively impacts stock market returns around the world in the short-term, while in the intermediate-term the markets recover some of the losses. Developed markets are less affected than emerging markets and large firms are better able to withstand the pandemic impact. The multiple regression results show that stock market size is positively related to CARs, and a country’s international exposure is negatively associated with short-run CARs but is positively associated with intermediate-term CARs. Contributions: This study documents evidence of stock market reactions around the world to the announcement of the COVID-19 pandemic by the WHO. The study focuses on the difference in the reaction by developed versus emerging markets and by large versus small firms. Further, this study provides several institutional factors that influence the extent of the impact of the COVID-19 pandemic on share prices. Knowing these factors would be useful to governments, policymakers and companies to design strategies to help markets becoming more resilient to systemic risks such as the COVID-19 pandemic.