Research / BFI Working PaperFeb 03, 2021

Firm-level Risk Exposures and Stock Returns in the Wake of COVID-19

Steven J. Davis, Stephen Hansen, Cristhian Seminario-Amez

Firm-level stock returns differ enormously in reaction to COVID-19 news. We characterize these reactions using the Risk Factors discussions in pre-pandemic 10-K filings and two text-analytic approaches: expert-curated dictionaries and supervised machine learning (ML). Bad COVID-19 news lowers returns for firms with high exposures to travel, traditional retail, aircraft production and energy supply – directly and via downstream demand linkages – and raises them for firms with high exposures to healthcare policy, e-commerce, web services, drug trials and materials that feed into supply chains for semiconductors, cloud computing and telecommunications. Monetary and fiscal policy responses to the pandemic strongly impact firm-level returns as well, but differently than pandemic news. Despite methodological differences, dictionary and ML approaches yield remarkably congruent return predictions. Importantly though, ML operates on a vastly larger feature space, yielding richer characterizations of risk exposures and outperforming the dictionary approach in goodness-of-fit. By integrating elements of both approaches, we uncover new risk factors and sharpen our explanations for firm-level returns. To illustrate the broader utility of our methods, we also apply them to explain firm-level returns in reaction to the March 2020 Super Tuesday election results.

More Research From These Scholars

White Paper Jun 16, 2020

The Unprecedented Stock Market Reaction to COVID-19

Scott R. Baker, Nicholas Bloom, Steven J. Davis, Kyle Kost, Marco Sammon, Tasaneeya Viratyosin
Topics:  Financial Markets, COVID-19
BFI Working Paper Oct 1, 2016

An Index of Global Economic Policy Uncertainty

Steven J. Davis
Topics:  Financial Markets, Monetary Policy
BFI Working Paper Jun 25, 2020

COVID-19 Is Also a Reallocation Shock

Jose Maria Barrero, Nick Bloom, Steven J. Davis
Topics:  COVID-19