Abstract
This paper uses event study based on the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model to study the impact of the COVID-19 outbreak on China’s financial market. It finds that the pandemic had an overall significant and negative impact on the stock prices of firms listed on SSE, SZSE and ChiNext. However, such impact appeared to be heterogeneous across industries, affecting listed firms in industries such as pharmaceutical and telecommunications positively, but those in services industries such as accommodation, catering, and commercial services negatively. Apparently, a crisis for some had been an opportunity for others. In addition, this paper seeks to understand the micro mechanism behind the heterogeneity of pandemic shock from the perspective of firms’ financial position. It finds that listed firms with higher debt level were hit harder, whereas those with more net cash flow had displayed higher resilience against the blow of the pandemic. However, the opposite pattern is found among those listed on ChiNext and in industries severely devastated by the pandemic. These findings have policy implications in terms of preventing systemic financial risks and facilitating recovery during pandemic-induced economic downturns. It also helps investor adjust investment strategies, hedge against risks, and secure gains when the market conditions in general are unfavorable.
Highlights
The black swan of COVID-19 has dealt a huge blow to the global economy and brought turmoil to financial markets worldwide
An event study is a method frequently seen in financial studies to measure the impact of an event, which is adopted in this paper to assess the “abnormal change” in the target variables caused by an external shock—the COVID-19 pandemic—over event window, and quantify the effect of the pandemic on firms and industries in China
Given that the market model obtained based on daily transaction data may not satisfy normal distribution and may show a volatility clustering tendency, we correct it with the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) (1,1) approach used in the study by Chen et al [42] rather than relying on the traditional OLS estimation for the event study
Summary
The black swan of COVID-19 has dealt a huge blow to the global economy and brought turmoil to financial markets worldwide. Compared with the handful of studies looking at how the pandemic affects the financial market in China at sectoral level [8], this paper unveils at micro level how firms’ financial position affects their ability to withstand the pandemic shock from the perspectives of firm liabilities and cash flow management. It finds that listed firms with higher debt level were hit harder, whereas those with more net cash flow had displayed higher resilience against the blow of the pandemic.
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