To Report or not to Report about Coronavirus? The Role of Periodic Reporting in Explaining Capital Market Reactions during the Global COVID-19 Pandemic

Abstract

We use a hand-collected sample of roughly 300 international firms included in leading stock-market indices in ten countries to investigate how firms’ reporting practices during the coronavirus (COVID-19) pandemic impact stock market reactions in term of stock performance and risk. For this, we claim that it is important to analyze whether firms are capable of early risk-detection and of adapting their reporting practices accordingly by examining whether firms promptly and appropriately incorporate critical current global developments, such as the coronavirus pandemic, in their reporting process. We hand-collect firms’ 2019 annual reports and analyze if and how extensively they include assessments of the coronavirus pandemic and its potential impact on their business activities by employing textual analysis. Next, we examine if and how this is incorporated in capital market reactions in terms of stock risk and stock performance. Our results highlight two main findings. First, by using the capital market model, we find that firms’ reporting on COVID-19 in early released annual reports leads to decreases in beta values. Thus, firms’ increased ability to detect risks early and report on the impact of COVID-19 leads to better stock risk assessments by capital markets, an effect that is amplified by state ownership. Second, we show that firms reporting about the coronavirus pandemic in their annual report exhibit a significant improvement in their abnormal returns compared to those that do not. Our findings indicate that investors value firms’ transparency and their ability to promptly incorporate critical global developments in their reporting process. Thus, we show that firms’ reporting practices play an important role in better understanding the current capital markets’ reactions to the ongoing coronavirus pandemic.