COVID-19 Pandemic, Corporate Investment and the Real Option Value

Abstract

The outbreak of COVID-19 has a huge negative impact on the firms’ business activities. This paper investigates the effects of COVID-19 pandemic on corporate investment and firm value from the real option perspective. Based on the real-option based model (ROM) proposed by Zhang (2000), we find that COVID-19 crisis accelerates low-profitability firms to reduce investment scale and exercise put options timely, thereby the value of put options is increased. This finding mainly exists in areas where the COVID-19 pandemic is worse and firms that have not received government subsidies related to COVID-19. We also find that the value of put options is more pronounced for non-state-owned enterprises and firms with higher internal control quality. However, we do not find the change of growth option value of high-profitability firms during the COVID-19, which indicates that it is difficult for high-profitability firms to grasp the investment expansion opportunities under the COVID-19 pandemic. Our study sheds light on the applicability of ROM and the importance of real option in firm valuation under the major public emergencies.

Keywords: COVID-19; Corporate Investment; Real Option Value; Put Options

JEL Classification: G12, G30, M41