Which stocks defied covid-19 shock better?

Firms that spent more on social responsibility and had better pre-coronavirus balance sheets suffered less on stock markets in recent months, a US study of over 6,000 companies in 56 economies shows.

In a working paper published by the National Bureau of Economic Research (NBER), Wenzhi Ding of the University of Hong Kong and others explore how five key corporate features could have shaped stock price reactions of different firms. These features were: financial conditions, supply chain exposure to countries hit by covid-19, corporate social responsibility (CSR), corporate governance, and ownership structure. Based on how the firms fared on these aspects before the pandemic, the authors analyse weekly stock returns for January-March this year, when covid-19 spread across the world and ravaged global markets.

Stock returns of firms with low cash balances fell 6 percent more than the others with all other traits similar, the study finds. For highly indebted companies, the drop was 10 percent more than those with lower debts. Further, having more customers and suppliers in countries affected more by covid-19 meant bigger declines for share prices.

Firms with higher CSR activities prior to covid-19 witnessed a 19 percent lesser decline in stock prices in the quarter. The authors attributed this to a possibly greater trust among shareholders in adverse times. The study finds that companies that were more flexible with takeovers and governance changes were valued better and experienced milder shocks. Stock prices of firms with more anti-takeover provisions dropped 24 percent more than others. Finally, the study finds that stocks of firms owned by non-financial entities were hit lesser, compared to those having major shares owned by hedge funds.

The study observed that financial markets performed better in richer economies and in nations with younger demographics.

Also read: Corporate immunity to the covid-19 pandemic

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