The impact of COVID-19 on the valuations of non-financial European firms

Abstract

This paper assesses the impact of the COVID-19 pandemic on non-financial firms' valuations in the European Union (EU) using a stress testing approach. Notably, the paper investigates the extent to which the COVID-19 may deteriorate non-financial firms' value in the ten EU countries to provide a robust anchor to policymakers in formulating strategic government interventions. We employ a sample of 5342 listed non-financial firms across the selected member states that have consistent analyst coverage from 2010 to 2019. First, we estimate the input sensitivities of free cash flow and residual income models using a random effect panel employed to in-sample data. Second, based on these sensitivities, we compute the model-driven ex-post valuations and compare their robustness with actual price and analyst forecasts for the same period. Finally, we introduce multiple stress scenarios that may emanate from COVID-19, i.e., a decline in expected sales and an increase/decrease in equity cost. Our findings show a significant loss in valuations across all sectors due to a possible reduction in sales and an increase in equity cost. In extreme cases, average firms in some industries may lose up to 60% of their intrinsic value in one year. The results remained consistent regardless of the cash flow or residual income-driven valuation.