Consequences of Covid-19 on Environment

Categories: Environmental Issues

Abstract

The market reactions to the 2019 novel Coronavirus disease (COVID-19) shed light on the importance of international trade and financial policies for firm value. Initially, investors priced negative consequences for internationally-oriented US firms, especially those with China exposure. As the virus spread to Europe and the US, markets moved feverishly. However, the cross-section of returns exhibits clear patterns. Corporate debt and cash holdings emerged as important value drivers, relevant even after the Fed intervened in the corporate bond market. Overall, the results illustrate how the health crisis morphed into an economic crisis amplified through financial channels.

Introduction

The outbreak of COVID-19 surprised the world economy.

 Of the 5 risks listed as being most likely to materialize in the World Economic Forum (2020)’s Global Risk Report, published on January 15, 2020, all five concern environmental issues. The topic ‘‘infectious diseases’’ was ranked number 10 in terms of impact, but quite unlikely. Most corporate decision-makers and politicians were focusing their attention on traditional sources of business risks or at most on the (still) pressing issue of climate change.

Only a few weeks later, attention shifted dramatically. On March 11, the World Health Organization characterized COVID-19 as a pandemic.

 Massive disruptions in personal lives took place, with half of the world’s population under curfew (or situations resembling curfew) at times. The future economic impact of COVID-19 is highly uncertain because the spread of the disease, its severity and mortality rate, the policy responses, and individual behavior are unknown. In this situation, considering asset price changes is particularly interesting.

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Price changes capture current expectations; the researcher need not trace all the future changes to cash flows and discount rates separately (Schwert, 1981). A study of the cross-section of stock price reactions to the COVID-19 pandemic provides an unfortunate, but valuable opportunity to gain insights into drivers of firm value and the workings of financial markets. First, it shows how investors value various types of firm characteristics. as well as on the effects of corporate debt and cash holdings. The latter are of interest to examine when and to which extent the contagion of the disease was perceived by investors to also bring risks of financial contagion. Second, it reveals how markets process information as a disaster unfolds.

For this purpose, it is particularly interesting to study stock price reactions in the US, which initially was not directly affected by COVID-19. Investors seem to have penalized not only firms trading with China, but also those internationally oriented more generally. A one standard deviation increase in the share of foreign revenues is associated with 1.66% lower cumulative returns, net of the effect of China exposure and other firm characteristics. Towards the end of February, while the situation in Europe and the US began worsening, the situation in China actually started improving. One would expect, therefore, stocks exposed to China to do relatively better. This is indeed what we find.

 

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Consequences of Covid-19 on Environment. (2021, Oct 31). Retrieved from http://envrexperts.com/free-essays/essay-about-consequences-covid-19-environment

Consequences of Covid-19 on Environment
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