Abstract
Using an event study methodology, this paper examines how European firms have been affected by the announcement of the Pandemic Emergency Purchase Program (PEPP) of the ECB. Firms with an investment-grade rating benefit relatively more as evidenced by higher share prices and lower CDS spreads, which reflects that the ECB is restricted to purchasing investment-grade corporate debt securities. The gains to shareholders relative to the total gains of shareholders and debtholders are negatively related to firm leverage, consistent with the existence of debt overhang. Firms more heavily impacted by the pandemic benefit relatively little from the PEPP, which could reflect that the business models of some of these firms are heavily damaged by the pandemic. Monetary policy in the form of the PEPP and national fiscal responses to the pandemic are shown to be complements in the sense that a strong pre-PEPP fiscal response enhances the potential for the PEPP to positively affect equity and debt valuations.
Highlights
The COVID-19 pandemic has caused a sharp reduction of economic activity, which negatively affected the revenues, liquidity and potentially solvency of many firms
Using an event study methodology, this paper examines how European firms have been affected by the announcement of the Pandemic Emergency Purchase Program (PEPP) of the ECB
We find that firms in highly affected industries benefit relatively little from the PEPP, as indicated by a relatively lower abnormal stock return and a relatively smaller decline in the CDS spread
Summary
The COVID-19 pandemic has caused a sharp reduction of economic activity, which negatively affected the revenues, liquidity and potentially solvency of many firms. We relate the various dependent variables reflecting share price and CDS spread changes to a range of independent variables that capture (i) the likely relative impact of the PEPP on the firm as indicated by the firm’s credit rating and reliance on bond finance, (ii) other firm characteristics that potentially proxy for credit constraints and debt overhang that could be alleviated by the PEPP, (iii) whether a firm belongs to an industry that is highly affected by COVID-19, and, (iv) the strength of pertinent national fiscal policy measures to counter the pandemic that potentially affect the implications of monetary policy for the firm. The COVID-19 crisis has differentially impacted the earning power of firms, and as a corollary any worsening of credit constraints and debt overhang that they may experience This implies that firms that are highly affected by the pandemic could see their share prices, CDS spreads and other derived valuation variables differentially affected by the PEPP.
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