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

62 Pages Posted: 5 Jun 2020 Last revised: 19 Oct 2020

See all articles by Rüdiger Fahlenbrach

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Kevin Rageth

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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Date Written: October 12, 2020

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.

Keywords: COVID-19, financial flexibility, cash holdings, leverage, short-term debt, stock returns, CDS premiums

JEL Classification: G01, G14, G32, G35

Suggested Citation

Fahlenbrach, Rüdiger and Rageth, Kevin and Stulz, Rene M., How Valuable is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis (October 12, 2020). Fisher College of Business Working Paper No. 2020-03-007, Charles A. Dice Working Paper No. 2020-07, Swiss Finance Institute Research Paper No. 20-37, Available at SSRN: https://ssrn.com/abstract=3586540 or http://dx.doi.org/10.2139/ssrn.3586540

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne ( email )

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Swiss Finance Institute

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European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kevin Rageth

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Extranef 244
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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