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How are Equity Valuations Affected by the COVID-19 Crisis

Dr. Alex Hsu, Assistant Professor, Finance

Dr. Alex Hsu, Assistant Professor, Finance

Alex Hsu, assistant professor of Finance has published a working paper “The Supply Channel of Uncertainty Shocks and the Cross-Section of Returns: Evidence From the COVID-19 Crisis” along with colleagues Lorenzo Bretscher, London Business School, Peter Simasek, Scheller College Ph.D. student, and Andrea Tamoni, Rutgers Business School.

The paper examines the impact of COVID-19 on equity valuations and asks two questions; how does this sudden increase in economic uncertainty caused by COVID-19 affect these valuations and what are the channels through which COVID-19 impacts firm-level outcomes? Because there is a lack of historical data of similar events, economists and market participants aren’t sure of the magnitude and length that output, demand, employment, earnings, etc., are expected to decrease. However, from their research, Hsu and colleagues found that companies in counties where the first case of the virus occurs show an average of 27 bps (basis points) decline in equity return over the subsequent 10 days.  In counties where the virus has a higher infection rate, the decline doubles to 50 bps. The paper also examines how some companies are more affected by the COVID shock through lower labor supply and productivity as opposed to lower consumer demand, namely companies in labor-intensive industries.

The working paper is available on SSRN.

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