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

Author

Listed:
  • Fahlenbrach, Rudiger

    (Ecole Polytechnique Federale de Lausanne and Swiss Financial Institute)

  • Rageth, Kevin

    (Ecole Polytechnique Federal de Lausanne and Swiss Financial Institute)

  • Stulz, Rene M.

    (Ohio State U and European Corporate Governance Institute)

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 lower by 26% or 9.7 percentage points than those with low financial flexibility. This differential return persists as stock prices rebound. The firms more exposed to the COVID-19 shock benefit more from cash holdings. There is no evidence that recent payouts made the average firm’s stock price drop worse. Our results cannot be explained by a leverage effect.

Suggested Citation

  • Fahlenbrach, Rudiger & Rageth, Kevin & Stulz, Rene M., 2020. "How Valuable Is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis," Working Paper Series 2020-07, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2020-07
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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