Do financial asset holdings affect investor expectations under negative events? The shock of COVID-19 pandemic

Abstract

Holding excessive financial assets will lead to corporate financialization, making investors underestimate its risks in front of extreme benefits and the “reservoir effect” in boom periods, especially in rapid-growing emerging economies. Few studies have explored the investors’ real perceptions and attitudes towards such risks when dealing with unexpected shocks. The 2019 novel coronavirus disease (COVID-19) provides new insights into these questions. Using event study method, this study examines how investors react to corporate financialization in the risk-release condition. First, we find that firms with more financial asset holdings experience significant lower market return during the COVID-19 pandemic. Second, we find that the pandemic-induced drop in stock returns is milder when firms hold more low-liquidity or safe financial assets, have higher solvency, are less exposed to COVID-19 pandemic and have better information environment. These findings show that the investors’ attitude is widely negative towards corporate financialization when the negative shock comes and strong financial flexibility and good corporate governance can alleviate the risk. It implicates that the hidden risks of corporate financialization can be perceived by investors and responded by “voting with their feet” and the managers should be alert to it rather than just seeking financial benefits.