Covid-19 and Firms’ Stock Price Growth: The Role of Market Capitalization

ABSTRACT

This paper studies the role of capitalization on firms’ stock price growth in response to new cases of Covid-19 infections in the United States. Controlling for firm and time fixed effects, our panel model estimates show that the effect of new cases of Covid-19 infections on firms’ stock price growth is significantly increasing in capitalization: For each one standard deviation increase in capitalization, a one standard deviation increase in new cases of Covid-19 infections increases the weekly growth rate of firms’ stock prices by about 0.7% points. Effects of capitalization on the impact that Covid-19 infections have on firms’ stock price growth are largest in the travel, tourism, and hospitality sector. Smaller but still positive effects of capitalization are present in the pharmaceutical products, high-tech, and banking and finance sectors. The results are robust to controlling firms’ elasticity of demand, productivity, financial constraints, managerial compensations, and aggregate money growth and economic activity.

KEYWORDS:

• Covid-19
• U.S. stock market
• performance of firms
• stock market capitalization

JEL CLASSIFICATION:

• G10
• G30
• E30

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Data for Wilshire U.S. large-cap and Wilshire U.S. small-cap are from Fred economic dataset.

https://fred.stlouisfed.org/series/WILLLRGCAPPR, and https://fred.stlouisfed.org/series/WILLSMLCAPPR, respectively.

² The data is available at https://ourworldindata.org/coronavirus-data. Note that the stringency index is defined as contained nine measures of government restrictions: school closures, workplace closures, cancellation of public events, restrictions on public gatherings, closures of public transport, stay-at-home requirements, public information campaigns, restrictions on internal movements, and international travel controls.

³ The data is available at https://www.msci.com/developed-markets.

⁴ The data is available at https://fred.stlouisfed.org/series/WEI and https://fred.stlouisfed.org/series/M2.

⁵ The high-tech dummy is equal to unity for firms doing business equipment, telephone, and television transmission and 0 otherwise. The labour-intensive dummy is equal to unity for firms in the airline, hotel, and delivery services and 0 otherwise. The classification is based on the industrial classification of the Fama-French library.