How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis | Zendy

Rüdiger Fahlenbrach | Zendy; Kevin Rageth | Zendy; René M. Stulz | Zendy

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How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis

Author(s) -

Rüdiger Fahlenbrach,

Kevin Rageth,

René M. Stulz

Publication year - 2020

Publication title -

review of financial studies

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 12.8

H-Index - 190

eISSN - 1465-7368

pISSN - 0893-9454

DOI - 10.1093/rfs/hhaa134

Subject(s) - leverage (statistics) , monetary economics , revenue , stock (firearms) , covid-19 , financial crisis , flexibility (engineering) , business , economics , cash , finance , financial system , macroeconomics , mechanical engineering , medicine , disease , management , pathology , machine learning , computer science , infectious disease (medical specialty) , engineering

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 that is 26$\%$, or 9.7 percentage points, lower than those with low financial flexibility. This differential return persists as stock prices rebound. Firms more exposed to the COVID-19 shock benefit more from cash holdings. No evidence suggests that recent payouts worsened the average firm’s drop in stock price. Our results cannot be explained by a leverage effect.

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