7. Conclusions and Discussion
The issue of the economic outcomes of the COVID-19 outbreak has gained considerable attention in the world. However, how exactly the continued increasing provincial cases of COVID-19 affects the firms’ market performance is not entirely understood. In this paper, we examine whether and how the continued increase of public health threats negatively affects the cumulative abnormal return.
Using the 178,805 firm-day observations from Chinese listed firms from 10 January to 31 March 2020, we find that the accumulative abnormal return is significantly lower among firms located in the provinces where face the continued increase of new confirmed COVID-19 cases. The relations remain constant after several robustness tests. These findings suggest that investors concern about the potential risk when firms are located in the provinces with higher threats to public health. In addition, we find that the relation between increasing provincial public health threat and firms’ abnormal return is affected by the regional information accessibility and economic growth.
Moreover, we conduct several additional tests to ensure the robustness of our results. First, we find that the continued decrease of provincial public health threats is positively related to the accumulative abnormal return. Second, we find that the community lockdown has a negative moderating effect on the negative relationship between continued increasing public health threats and accumulative abnormal return. Third, we find that the negative effect of increasing threats is weaker for firms with a higher level of geographical diversification, operating cash flow, and with a clean audit opinion. Fourth, we find that our results are not driven by the fluctuations in the number of new confirmed COVID-19 cases.
This study contributes to the literature in many aspects. First, we add to the growing literature on the role that public health threats play in market reactions. Prior studies contend that the firms in heavy-polluting industries have a negative market reaction to the passage of the Environmental Protection Tax Law [39]; negative cumulative abnormal returns occur during short windows around pollution events [38]; and insurance firms have higher abnormal returns around the event window in most of the hurricane hazards [37]. These findings suggest that the increase in public health risks affects the markets. We add to this body of research by showing that the continued increase of COVID-19 cases at the provincial level will negatively affect the firm’s market performance by enhancing the investors’ risk assessment.
Second, we also contribute to the literature on risk assessment on COVID-19 and provide evidence that continued increasing regional public health threats are an essential determinant of local firms’ share prices. This study answers Zhang and Shaw’s [1] call for multi-disciplinary research incorporating public health and socioeconomics. Our findings shed light on this observation and suggest that the provincial-level threats of public health play a substantial role in determining local firms’ market performance. Moreover, compared to the prior COVID-19 related studies based on the evidence from China’s market [3], this study uses a much larger sample to test the effect of continued increasing public health threats, which enhance the statistical power. Considering the limitations of the cross-country setting [2,4,7,24], this study supplements prior studies by focusing on one single market.
Third, we add the literature on the moderate effects of macro factors on public health threats. This study shows that provincial-based continued increased cases of COVID-19 affect investors’ expectations of the local firms’ exposure to increased risk of public health. Moreover, our cross-sectional analyses show that investors’ risk assessment could be driven by the provincial level of information asymmetry and economic outlook.
Fourth, we extend the literature on information disclosure and show the usefulness of the timely disclosure on disease information from the governmental institution. It will be helpful to the investor for facilitating decision making. This study provides evidence that the continued increase of provincial new confirmed COVID-19 cases is an essential signal for investors.
This study has several implications for interested parties. Investors should realize the usefulness of the non-financial information and pay more attention to the detailed information related to public health threats. Companies need to enhance the level of geographical diversification, operating cash flow, and reporting quality for mitigating the negative effect of local public health threats on their market performance. For the government and policymakers, they should understand the important moderate effects of the local environment on the negative effect of public health threats and take the balance of the cross-provinces development from the perspectives of the information technology and economics.
Our study has several limitations that could be addressed by future studies. First, we add several cross-sectional tests, the instrumental variables approach, and many control variables to mitigate the endogeneity concerns. However, it is difficult to rule out all confounding factors using archival data. Second, the abnormal return measures are inherently limited and may not entirely represent abnormal returns. Third, given that the institutional characteristics of China are different from other countries, the negative effect of continued increasing public health threats may not exist in other settings. Fourth, considering the difficulty of the measurement for the regional public health threats, information accessibility, and economic growth (e.g., we fail to measure the quality of news information), we merely provide some testable proxies to represent these concepts and show that they relate to the investors’ risk assessment on continued public health threats.