Regulations as Automatic Stabilizers During COVID-19

Abstract

This paper shows that regulations are automatic stabilizers for firms in the COVID-19 crisis. During the pandemic, more heavily regulated companies had stock and corporate bond returns that were four to five percent higher than less regulated firms. Prior to the crisis, highly regulated firms held more cash, had lower leverage, and were less likely to pay dividends, making them more resilient to extreme market conditions. More regulated firms also had lower systematic risk exposures during the crisis. Similar effects of regulations are found in the 2008 Financial Crisis. Furthermore, regulations on average do not lead to inferior stock returns.

Keywords: Regulation, COVID-19, Valuation, Risk

JEL Classification: G01, G14, G18, M48