The Covid-19 Pandemic and the Consumer Staples Sector: A Test of Market Efficiency

Abstract

On Wednesday March 11, 2020, the World Health Organization (WHO) declared the covid 19 outbreak a global pandemic (Cucinotta, 2020). How efficient is the consumer staples market reaction to the announcement of a global pandemic? The purpose of this study is to examine the risk adjusted returns on and around the pandemic announcement to test the semi-strong form market efficiency hypothesis using the standard event study methodology in the finance literature. Will returns in the consumer staples industry show larger than expected gains on and surrounding the WHO’s COVID-19 pandemic announcement? The finance literature offers little evidence supporting the link between pandemics and the stock market. The announcement of a pandemic by the WHO should significantly and quickly affect the market. According to Eugene Fama (1970), if the market is semi-strong form efficient, all public information is immediately factored into the market and no investor can use this information to achieve an above normal return when adjusted for risk. To study this relationship, data for the S&P 500 and 10 consumer staples sector firms were collected for the event period surrounding the announcement of the COVID-19 pandemic. This study tests the global pandemic announcement for semi-strong form market efficiency (Bacon &Howell 2021). Evidence here supports the expected positive signal associated with the sample of consumer staples sector firms in reaction to the announcement of the pandemic. Likewise, the study results support the semi-strong form efficient market hypothesis and suggest the possibility of trading on this information up to 15 days prior to the announcement consistent with the behavioral finance literature (Bacon & Howell 2021).