Heterogeneous Market Reactions to Pandemic Announcements: Evidence from China

ABSTRACT

This study finds that market reactions are overall positive to World Health Organization (WHO)’s announcing COVID-19 a pandemic. The effect is greater among firms with more financial flexibility. We found the positive market reactions are explained by market expectation of government emergency interventions. Market reactions are more positive in regions with a more supportive government and with higher density of state-owned banks. Results imply that government interventions relieve the financial constraints of the private sector through credit lending. Finally, in the first quarter of 2020, only financially flexible firms are able to increase cash holdings.

KEYWORDS:

• Government intervention
• financial flexibility
• resource allocation
• COVID-19

JEL:

• G32
• G14
• O16

Acknowledgement

We sincerely thank the valuable comments from the seminar participants at Xiamen University. This project is funded by the Fundamental Research Funds for Central Universities in China (No.2072021122), by the Young Scholar Project of Natural Science Foundation of China (No. 7210020725), by the Natural Science Foundation of China (No. 71373219), and by the National Social Science Foundation of China (No. 15ZDA028). All errors are our own.

Disclosure statement

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

Additional information

Funding

 The work was supported by the National Natural Science Foundation of China [71373219, 72102202]; National Social Science Fund of China [15ZD028]; Central Universities Research Fund [20720181109, 2072021122]