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

Rüdiger Fahlenbrach, Kevin Rageth, René M. Stulz

NBER Working Paper No. 27106
Issued in May 2020, Revised in June 2020
NBER Program(s):Corporate Finance

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 experience a stock price drop lower by 26% or 9.7 percentage points than those with low financial flexibility accounting for a firm’s industry. This differential return persists as stock prices rebound. Similar results hold for CDS spreads. The stock price of a firm with an average payout over assets ratio would have dropped 2 percentage points less with no payouts for the last three years.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w27106