How valuable is financial flexibility when revenue stops? : evidence from the COVID-19 crisis

Rüdiger Fahlenbrach (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and ECGI), Kevin Rageth (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute), René M. Stulz (The Ohio State University, NBER, and ECGI)

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 lower by 26% or 9.7 percentage points than those with low financial flexibility. This differential return persists as stock prices rebound. The firms more exposed to the COVID-19 shock benefit more from cash holdings. There is no evidence that recent payouts made the average firm's stock price drop worse. Our results cannot be explained by a leverage effect

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Year of publication:	May 2020 ; Revised May 17, 2020
Authors:	Fahlenbrach, Rüdiger ; Rageth, Kevin ; Stulz, René M.
Publisher:	[Columbus, Ohio] : The Ohio State University, Fisher College of Business, Charles A. Dice Center for Research in Financial Economics
Subject:	COVID-19 \| financial flexibility \| cash holdings \| leverage \| short-term debt \| stock returns \| CDS premiums \| Coronavirus \| Betriebliche Liquidität \| Corporate liquidity \| Kreditderivat \| Credit derivative \| Kapitalstruktur \| Capital structure \| Cash-Management \| Cash management \| Kapitalmarktrendite \| Capital market returns \| Welt \| World \| Unternehmensfinanzierung \| Corporate finance \| Kapitaleinkommen \| Capital income