2. Background, Literature, and Hypothesis Development

2.1. Background of COVID-19
World Health Organization (WHO) first released the novel coronavirus (2019-nCoV) situation report on 21 January 2020 and clarified the first human cases of COVID-19 were reported in Wuhan, China, in December 2019 [8]. The report also confirmed the initial 282 cases worldwide by 20 January 2020, which contains 278 cases from China, 1 case from Japan, 1 case from the Republic of Korea, and 2 cases from Thailand. In China, the cases were mainly confirmed in the Hubei Province (258 cases), then 14 cases in the Guangdong Province, 5 cases in Beijing Municipality, and 1 case in Shanghai Municipality [8]. On 23 January 2020, restrictions on mobility were imposed on Wuhan city, and partial movement restrictions were enacted in numerous cities across China. Prior studies show the positive effect of restriction of human mobility on the mitigation of the COVID-19 spread in China [9,10,11,12]. COVID-19 has shown the improvement of China’s global health technology and capability [13].
Due to the rapidly spreading of COVID-19, the WHO declared the COVID-19 outbreak a Public Health Emergency of International Concern on 30 January 2020 [14]. Worldwide, the COVID-19 pandemic has infected 9,843,073 cases and lead to 495,760 deaths by 10:00 CEST, 20 June 2020, according to the WHO [15]. Specifically, by the WHO region, Americas, Europe and Eastern Mediterranean had higher amount of confirmed cases (deaths) of COVID-19, 4,933,972 (241,931), 2,656,437 (196,541) and 1,024,222 (23,449), respectively [15].

2.2. Literature Review
Zhang and Shaw [1] investigate the content of coronavirus-related research published in the journals indexed in the Science Citation Index Expanded and Social Sciences Citation Index from 2000 to 2020. Furthermore, the textual analysis shows that coronavirus-related research mainly focuses on virology, immunology, epidemiology, and so forth. However, there are few studies that discuss the risk assessment. In addition, in Di Gennaro et al.’s [16] review paper on COVID-19, they focus on the literature about epidemiology, pathophysiology, diagnosis, management, and future perspective, but not the social and economic impacts of COVID-19.
Regarding prior studies on investigating the social impacts of the COVID-19 outbreak, Ahmed et al.’s [17] questionnaire results demonstrate that dental practitioners who are working in the areas where face COVID-19 pandemic threats show a state of anxiety and fear, which suggests that COVID-19 outbreak has a negative effect on sentiment. Similar survey results show in Israeli dentists and dental hygienists [18]. In addition, Auerbach and Miller [19] highlight a severe issue regarding the shortage of mental health professionals due to the coronavirus pandemic. Li et al. [20] and Wang et al. [21] also illustrate that social risks lead to negative psychological consequences with increasing negative emotions. Besides, Chen et al. [22] document that the COVID-19 oriented risk positively affects the behaviors of hand-washing and mask-wearing based on the survey data from primary school students in Wuhan, China. Moreover, He et al. [23] approve the evidence that discrimination and social exclusion occurred after the outbreak of COVID-19.
Regarding prior studies on investigating the economic impacts of COVID-19 outbreak, first, for the cross-country studies, Ashraf [24] finds the growth in the number of country-level confirmed cases of COVID-19 has a negative effect on stock markets based on the 64 countries over the period 22 January to 17 April 2020. In addition, Engelhardt et al. [7] confirm that news attention of COVID-19 associate with the stock markets’ decline. Also, Zhang et al. [4] show that the COVID-19 pandemic leads to an increase in global financial market risks based on the cross-country evidence. Moreover, Liu et al. conduct an event study method and find that stock markets affected by COVID-19 fell quickly after the COVID-19 outbreak. Second, for the single country studies, based on the statistical figure from India, Singh and Neog [25] illustrate that the COVID-19 outbreak leads to an economic contraction in terms of macro-economy, tourism, transportation, stock market, human capital, and trade. Al-Awadhi et al. [3] use Chinese data and find that daily new confirmed COVID-19 cases and deaths negatively affect stock returns. Based on the U.S. daily data Sharif et al. [26] show that COVID-19 leads to oil price volatility shock, economic policy uncertainty, and stock market volatility. Using U.K. data from 2 January to 20 May 2020, Griffith et al. [5] show the impact of COVID-19 on share prices differs from industries.
However, the relationship between the regional continued increasing COVID-19 cases and the firms’ market reaction remains unexplored. Focusing on the early period of the COVID-19 outbreak in China, this study attempts to fill the gap and investigate the negative effect of continued increasing provincial public health threats (driven by COVID-19) on the local firms’ market performance.

2.3. Hypothesis Development

2.3.1. Main Hypothesis
Continued increasing public health threats can negatively affect cumulative abnormal return for the following reasons. First, prior studies show that environmental uncertainty will negatively influence investor valuations and investor sentiment [6,27,28]. Also, prior studies show that individual psychology is related to stock price valuation [29,30,31]. Moreover, based on the Sina-Weibo (Chinese microblogging website) content analysis, Han et al. [32] show that public sentiments are sensitively affected by the epidemic and social events. In the case of the COVID-19 outbreak in China, the continued increase in the amount of new confirmed cases in one specific provincial region will enhance the uncertainty of the firms’ short-term and long-term performance in this area, which negatively influences investor valuations of local firms.
Second, prior research shows that the outbreak of the disease would increase the economic cost and shrink the profits in international markets [33,34,35]. In addition, economic conditions would affect the investors’ expectations of risks [36]. In the case of the COVID-19 outbreak in China, the continued increase in the amount of new confirmed cases in one specific provincial region will enhance the local economic cost and then enhance the investors’ risk assessment.
Third, several studies show that event risks (e.g., pollution events, hurricane disasters) will have a negative effect on firm valuation [37,38,39]. Moreover, Liu et al. [40] emphasize that significant events lead to abrupt changes in stock prices and volatility, and investors are more likely to hold less risky assets. In the case of the COVID-19 outbreak in China, the continued increase in the amount of new confirmed cases in one specific provincial region may increase the event risk and investors would be less likely to hold the financial assets from that area.
Overall, firms’ market performance may be negatively affected by the regional continued increasing public health threats. Based on the above discussions, the first hypothesis is as follows (in an alternative form):
Hypothesis 1 (H1).    Firms located in the provinces where face continued increase of public health threats are more likely to have a poor stock market performance.
Notwithstanding the above arguments, there are a few reasons why firms’ market performance may not be negatively affected by COVID-19 situations. First, some investors might not be aware of the risks of the continued increase of COVID-19 cases. Even if investors have this awareness, they would still focus on the long-term performance of their investment portfolios. Second, the COVID-19 outbreak may bring opportunities to firms for generating more products to meet the increased demand currently and in the near future, which potentially leads to a positive effect on the performance. Third, investors might not focus on the daily based non-financial information from the National Health Commission of the People’s Republic of China, which leads to less value relevance for the COVID-19 disclosure. Taken together, whether the results consistent with H1 is an empirical question.

2.3.2. Cross-Sectional Analyses
To support the theory and main hypothesis that the regional continued increasing public health threats influence the local firms’ market performance by enhancing the environmental uncertainty and investors’ risk assessment, we propose two sets of cross-sectional predictions that analyze the variation in the regional public health threats-oriented uncertainty and risk assessment.
One crucial channel underlying H1 is that continued increasing provincial public health threats can influence investor sentiment, thus enhance the risk assessment. Prior research suggests that information asymmetry has an effect on investor sentiment [41,42,43]. Specifically, Schmeling [42] finds that information asymmetry amplifies the negative effect of sentiment on future stock returns based on the cross-country evidence. In the case of regional information accessibility, we conjecture that if the investor could access more regional information, they will be less sentiment about increasing threats. We expect that stronger information accessibility will decrease the investors’ risk assessment by mitigating the information asymmetry. Consistent with this notion, Chakravarty et al. [44] apply the number of news reports as an inverse measure of information asymmetry and find that the number of news reports reduces the magnitude of the price discount. In addition, Bonsall et al. [45] find that wider media coverage, in terms of the news article number regarding earnings announcement, relates to the improvement in investor informedness during periods of higher market uncertainty. Base on the discussion, our first cross-sectional hypothesis is as follows (in an alternative form):
Hypothesis 2a (H2a).    The negative effect of continued increasing provincial public health threats on market reaction, as hypothesized in H1, is less pronounced when the provincial information accessibility is stronger.
For the primary hypothesis, we assume that provincial continued increasing threats reduce the local firms’ stock market performance because such circumstances can enhance the uncertainty and investors’ risk assessment. However, if such circumstances occurred in a province where shows strong economic growth, then investors will have a lower level of risk assessment to constrain the investment. Prior studies documents that long-term equity premium is related to economic growth [46,47]. Moreover, Ludvigson [48] shows that economic activities relate to consumer confidence, and Chen [49] finds that a lack of consumer confidence leads to a higher likelihood of turning to a bearish stock market. Taken together, we suppose that stronger economic growth will decrease the investors’ risk assessment by enhancing the likelihood to have a positive outlook on the future market performance. Our second cross-sectional hypothesis is as follows (in an alternative form):
Hypothesis 2b (H2b).    The negative effect of continued increasing provincial public health threats on market reaction, as hypothesized in H1, is less pronounced when the provincial economic growth is stronger.