Global Connectedness and Diversification : Firm-level Evidence from the COVID-19 Pandemic

We study how a firm's global connectedness through global supply chains and exports affects its stock market performance during crises. While global connectedness can expose firms to negative foreign shocks, it potentially reduces firms' susceptibility to domestic shocks by allowing international diversification. Using weekly global stock market data combined with firm-level supply chain, export, and balance sheet information, we show that, while firms' global supply chain and export networks expose firms to the negative impact of foreign COVID-19 outbreaks, firms with higher global connectedness are also more resilient to domestic COVID-19 exposures in stock markets. Consistent with the international diversification channel, global connectedness alleviates the negative impact of domestic COVID-19 exposures only if connected foreign economies experience a smaller rate of increase in COVID-19 cases than the domestic economy. We investigate various operational outcomes and find that such diversification motive leads firms to reorganize their global supply chain and export structures to mitigate the negative impact of COVID-19 exposures