When does Cash-flow Risk Matter to Investors? Evidence from the COVID-19 Pandemic
45 Pages Posted: 3 Apr 2020 Last revised: 8 Jun 2020
Date Written: June 6, 2020
I use the exogenous shock to aggregate consumption caused by the COVID-19 pandemic to examine the importance of cash-flow risk for investors. I find that the industry long-run cash-flow risk predicted which industries performed worst during the pandemic. High cash-flow risk industries experienced abnormally low excess returns and substantially higher risk levels during the first three months of 2020. I use dividend futures data to show that the equity term structure inverted and forward equity yields proliferated after mid-March 2020, which may explain the heightened relevance of cash-flow risk during the pandemic.
Keywords: COVID-19 pandemic, equity term structure, US industry performance, consumption shocks
JEL Classification: G01, G12
Suggested Citation: Suggested Citation