The impact of COVID-19 on valuations of non-financial European firms

Abstract

This paper assesses the impact of the COVID-19 pandemic on valuation of non-financial firms in the European Union (EU) using a stress testing scenario approach. Particularly, the paper investigates to what extent the COVID-19 may deteriorate the value of non-financial firms in the 10 EU countries in order to provide a robust anchor to policy makers in formulating strategic government interventions. We utilize a sample of 5342 listed non-financial firms across 10 EU member states that have consistent analyst coverage from 2010 to 2019. First, we estimate the input sensitivities of free cash flow and residual income models using a random effect panel employed to in-sample data. Second, based on these sensitivities, we compute the model driven ex post valuations and compare their robustness with actual price and analyst forecasts for the same period. Finally, we introduce multiple stress scenarios that may emanate from COVID-19, i.e. decline in expected sales and increase/decrease in cost of equity.

Our findings show a significant loss in valuations across all sectors due to a possible decline in sales and increase in cost of equity. In the extreme cases, average firms in some sectors may lose up to 60% of their intrinsic value in one year. The results remained consistent regardless of the cash flow or residual income driven valuation. While the impact of global financial crisis (2007-2008) and European crisis (2010-2012) on non-financial firms is well-documented, this paper is the first study that analyzed the impact of the COVID-19 crisis on the non-financial firms’ valuation in the European Union and reports that pandemic is the main driver behind the shareholder value destruction.

Keywords: COVID-19, Valuation, Non-Financial-European-Firms, Stress-testing-scenarios

JEL Classification: G01, G10, G11, G20