Heterogeneous Stock Market Reactions to COVID-19 : More Hidden Mechanisms

This paper studies the heterogeneous effects of the COVID-19 outbreak on stock prices in China and its hidden mechanisms from multi perspectives. First, we confirm the recent conclusion that the spread of the epidemic has a significant negative impact on stock market returns. However, this effect is heterogeneous for different industries. In particular, stocks not only in the pharmaceutical manufacturing industry but also in its upstream industry, the chemical industry, even benefit from the epidemic. Second, we construct a fear sentiment index by using data from searching volume of COVID-19 related words and find that the fear sentiment can directly cause the stock price to fall. Moreover, the panic will exacerbate the negative impact of the epidemic on stock returns. Third, and most importantly, we demonstrate the underlying mechanisms from four firm characteristics. The results show that companies with high asset intensity, low labor intensity, high inventory-to-revenues ratio, and small market value are more negatively affected. We argue that the labor employment in state-owned enterprises is less flexible, so for labor-intensive state-owned firms, their stock performance worsens because of higher idle labor costs. Our evidence also strongly supports this hypothesis. Finally, we create a brand new index based on the WIOD input-output database to measure the relative position of an industry in the supply chain. Our findings show that companies located downstream are more vulnerable to the COVID-19 outbreak