The Invisible Business Risk of the Covid-19 Pandemic

Lambert here: “More research needed.” Really?

By Jordan Schoenfeld, Associate Professor of Accounting, Tuck School of Business, Dartmouth College. Originally published at VoxEU.

Are pandemics systemically important to modern-day financial markets? It is not obvious how a financial market’s myriad interconnected parts would react to a pandemic-induced supply and demand shock. This column shows that the COVID-19 pandemic triggered unprecedented changes in employment levels and the values of stocks, bonds, commodities, and currencies. Corporate managers also systematically underestimated their business-model exposure to pandemics in their annual report risk factors.

Attesting to the economic significance of the COVID-19 pandemic, central banks and governments across the globe have recently implemented large economic stimulus plans to prop up their respective economies (Baldwin and Weder di Mauro 2020). We know from prior research that there are severe health and economic implications of pandemics at the individual level (e.g. Acemoglu et al. 2003, Almond and Mazumder 2005). However, there is limited research on the immediate effects of pandemics on the financial system.

It is not obvious how the financial system’s myriad interconnected parts would react to a large pandemic-induced supply and demand shock. In a recent study, I examine whether, and to what extent, pandemics pose a serious risk to the financial system (Schoenfeld 2020). I also examine whether managers anticipated pandemic risk using firms’ risk factors in their annual reports. Although my study focuses mainly on data from the US, it is clear from media reports and other sources that many of the results easily generalise to other countries.

The Impact of the Covid-19 Pandemic on Asset Prices

I first examine the pandemic’s effect on the stock market. I observe the largest decreases in firm value for petroleum and natural gas firms, apparel firms, restaurant and hotel firms, automobile firms, transportation firms, machinery firms, and aircraft, ship, and railroad firms. By contrast, I observe smaller decreases in firm value for food product firms, healthcare firms, utility firms, and business services firms. The firms with the largest decreases in value at the pandemic’s onset include Norwegian Cruise Lines (-86.0% change in value), Noble Energy (-83.7%), Royal Caribbean Cruises (-83.4%), Halliburton (-80.6%), and Carnival (-80.5%). A small set of firms also increased in value at the pandemic’s onset, suggesting that investors might be expecting increased demand for these firms’ goods and services. This group of firms includes Walmart (+0.4%), General Mills (+3.0%), Netflix (+0.6%), Clorox (+26.0%), and Regeneron Pharmaceuticals (+31.2%).

Other asset classes were also impacted by the pandemic. Government bonds increased in value as central banks cut benchmark interest rates and unveiled large bond-buying programmes. Although the Federal Reserve also committed to purchasing corporate bonds, the S&P corporate bond index decreased in value, presumably because of heightened credit risk among investors. Many commodities also decreased in value, particularly oil and natural gas. Gold, by contrast, increased in value. The US dollar also strengthened relative to several foreign currencies.

COVID-19 and Employment

The pandemic also significantly impacted the labour market. According to the US Department of Labor, for the week ending 21 March 2020, seasonally adjusted initial unemployment claims were 3,307,000, an increase of 3,025,000 from the previous week’s level of 282,000. This was the highest level ever for such claims, but that number was surpassed in the week ending 28 March 2020, when it reached 6,480,000 (and again in the week after that).

Corporate Managers Systematically Underestimated Their Exposure to Pandemics

I next examine whether managers anticipated their exposure to pandemics by hand collecting and reading the risk factor section (‘Item 1A’) of the annual reports for all firms in the S&P 500 as of January 2020. By regulator mandate, firms’ risk factors are required to include “information about the most significant risks that apply to the company or to its securities”. Under this mandate, managers can be sued for violating their obligation to disclose value-relevant information.

I find that about 46% of these firms included pandemics (or related risks such as diseases or health crises) in their risk factors leading up to the COVID-19 pandemic’s onset. To illustrate, Norwegian Cruise Lines includes the following in its risk factors:

Epidemics and viral outbreaks could have an adverse effect on our business, financial condition and results of operations. Public perception about the safety of travel and adverse publicity related to passenger or crew illness, such as incidents of viral illnesses, stomach flu or other contagious diseases, may impact demand for cruises and result in cruise cancellations and employee absenteeism. If any wide-ranging health scare should occur, our business, financial condition and results of operations would likely be adversely affected.

Given that 46% of the firms in S&P 500 included pandemics in their business risk factors, any financial impact from a pandemic should, insofar as these risk factors are accurate and complete, be largely contained to these exposed firms. However, about 95% of the S&P 500 firms decreased in value from January to March 2020. In fact, the 54% of firms that did not include pandemics in their risk factors exhibited a mean decrease in value of 32% from January to March. The magnitude and sign of this result almost exactly equal the 32% mean decrease in value exhibited by firms that did include pandemics in their risk factors. On aggregate, these findings translate to an economic loss of $18 billion per firm on average, or about $9 trillion in total for S&P 500 firms alone. These results are robust to a variety of buy and hold return periods.

In addition, whether a firm included pandemics as a risk factor does not significantly correlate with (or predict) its return volatility or the signed magnitude of its change in value at the pandemic’s onset. This null result also obtains for measures akin to return volatility such as unsigned changes in firm value, and after controlling for a firm’s industry, size, and other attributes. These findings suggest that managers systematically underestimated their true exposure to pandemics, and that with respect to pandemics, firms’ risk factors had a significant blind spot. Thus, investors could not have systematically deduced which firms would be exposed to the COVID-19 pandemic based on firms’ risk factors alone.

Rethinking Corporate Exposure to Pandemics

Overall, the evidence presented provides one of the first systematic assessments of how the COVID-19 pandemic affected the financial markets. The fact that many managers did not include pandemics as a risk factor is somewhat surprising given that pandemics and disease outbreaks are not new phenomena: they occurred on smaller scales in the 2000s with the SARS, H1N1, Ebola, and Zika viruses, and on large scales several times in the 1900s and in earlier periods.

Carmen Reinhart recently argued that there is no “historical episode that can provide any insight as to the likely economic consequences of the unfolding global coronavirus crisis” (Reinhart, 2020). Additional research will be needed to determine the long-run economic impact of the pandemic (Horn et al. 2020).

References available at the original.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Susan the other

    How hard would it be for economists to research reality? Would it be like a mental phase change? The Financial System – the finsys – will obviously do the only thing it can do: rehypothecate collateral. Ad infinitum if necessary. It’s all just bookkeeping. Somewhere toward the end of money-as-we-know-it, the finsys will have liquified the tangible value of everything. Down to the farthest decimal. (a farthing?). There is actually no risk to the financial system itself to reconfigure “value” so why do they claim it is an outrage for the peoples’ Treasury to spend directly into the fiscal system? The fiscal system is the only process which creates real value in the first place.

    1. Generalfeldmarschall von Hindenburg

      rehypothecate collateral.- thanks! That’s so useful. I’m gonna be all over with that.

  2. Kouros

    Oh, companies not properly assessing the risk to pandemics, what a surprise! Working on a research proposal to investigate the secondary effects of Covid-19 for a grant, I went to evaluate the planning for influenza type pandemics of health agencies (federal & provincial). Oh my goodness, nothing useful from an operational preparedness perspective. All was written from 20 km altitude and no appendices for details…

    Everything that was done was done almost by ear, no forethought, no following of a well thought script/risk assessment done prior, you know, the way the follow protocols in aviation or other industries when accidents or malfunctions happen. Dismal. And China is to blame!

    1. dk

      Yes, what’s unprecedented is the attempt to run an economy with such tight margins and without mechanisms of capacity as if rates of consumption would never fluctuate significantly.

      A truly novel practice not previously seen in human history (although it’s possible that no one remembers it because whoever did it was consequently wiped off of the face of the earth without a trace).

      1. eg

        Arguably Jared Diamond’s “Collapse” is nothing but almost 600 pages about just such arrangements.

        Spoiler alert — they don’t end well …

  3. Jabbawocky

    As if stock value now is a sensible way to evaluate the impact. Try value in 12 months time.

  4. Tom

    The corporate commissars of capitalism mirror perfectly the state commissars of the old USSR. Power monopolies that know how to play bureaucratic games without actually accomplishing anything useful. Old, tired, and ready to die.

  5. Tom Stone

    Here in the wine Country there’s nothing but blue skies and hard times ahead!
    Until the wildfires start…

  6. Chauncey Gardiner

    Disagree with the writer. It is self evident “how a financial market’s myriad interconnected parts would react to a pandemic-induced supply and demand shock”. This is apparent from the Feb 19th to March 23rd market plunge. Subsequently we have seen trillions of dollars in net new QE cash liquidity from the central bank injected into the financial system that has served to save and resurrect both stock and bond prices. As billionaire former hedge fund manager Stanley Druckenmiller has observed, the Fed’s QE policy has been the single greatest cause of wealth and income inequality, nothing else even comes close.

    The effects of this pandemic provide our “essential workers” with the negotiating leverage to insist on changes to the policies that have led to such concentration of income and wealth in such a small segment of the population, as the Fed itself well knows from its own charts:

    I would also be surprised if there are many in that relatively small group who most Americans would regard as “essential workers”.

  7. NM

    I can understand why you chose not to adjust Healthcare downwards significantly. However in the last GDP report, the Q1 GDP was down 4.8%, and of that Healthcare was down 2.25%, almost 50% of the total GDP reduction. There will be winners and losers in healthcare. There has already been a significant number of layoffs in the sectors. Certain companies that will be hit hard for some time including the entire dental industry. I don’t know how that reconciles with the author’s projections.

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