How Valuable is Financial Flexibility When Revenue Stops? Evidence from the Covid-19 Crisis

62 Pages Posted: 12 May 2020 Last revised: 27 Jun 2021

See all articles by Rüdiger Fahlenbrach

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Kevin Rageth

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

René Stulz

Ohio State University (OSU) - Fisher College of Business

Date Written: May 2020

Abstract

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.

Suggested Citation

Fahlenbrach, Rüdiger and Rageth, Kevin and Stulz, René, How Valuable is Financial Flexibility When Revenue Stops? Evidence from the Covid-19 Crisis (May 2020). NBER Working Paper No. w27106, Available at SSRN: https://ssrn.com/abstract=3597838

Rüdiger Fahlenbrach (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

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1015 Lausanne, CH-1015
Switzerland
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Swiss Finance Institute

c/o University of Geneva
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European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kevin Rageth

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Extranef 244
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

René Stulz

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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