Impact of the COVID-19 outbreak on stock returns of Indian healthcare and tourism sectors

Abstract

The rapid spread of the novel coronavirus pandemic (COVID-19) has adversely impacted global economies and stock markets. This study employs an event study methodology to assess the impact of COVID-19 on stock returns in the healthcare (66 stocks) and tourism (39 stocks) sectors in Indian markets surrounding two events: a) the first COVID-19 case reported in India and b) the announcement of a nationwide lockdown. The findings indicate that investors’ reactions to both events were distinct and asymmetric in healthcare and tourism sectors. The tourism sector stocks react more negatively to the second event than the first, with –2.46% vs. –0.59% event day abnormal returns, respectively. The corresponding figures for healthcare sector stocks are –0.68% and –0.16%, respectively. As expected, pandemic events had a minor negative impact on the healthcare sector. Surprisingly, the tourism industry did not react negatively to the first event. Investors in the tourism industry underreacted to the first reported case; they could not predict the potential consequences and then overreacted to the lockdown announcement. The findings support the behavioral finance theory of underreaction and overreaction, particularly in stressful situations. The study has implications for investors and money managers looking for profitable investment opportunities due to temporary dislocations in stock prices caused by investors’ irrational reactions to certain black swan events.