Regulations as Automatic Stabilizers During COVID-19
60 Pages Posted: 15 Jun 2020 Last revised: 17 Aug 2020
Date Written: May 15, 2020
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
Suggested Citation: Suggested Citation