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

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