Equity Market Responses to Surprise COVID-19 Lockdowns : The Role of Pandemic-Driven Uncertainty

Negative equity market reactions at the onset of the Covid-19 crisis raised concerns about the vulnerabilities in non-financial firms, requiring swift actions by central banks to prevent system-wide stresses. We investigate the Indian context, where the announcement of a surprise, nationwide lockdown in March 2020, was followed by the announcement of an unanticipated policy package by the central bank a few days later. Using natural language processing on quarterly earnings call reports, we construct a firm-specific measure of concern about the pandemic for a set of Indian non-financial firms. We find that firms that were exposed to the pandemic in early 2020 had worse stock market performance when the lockdown was announced. These results seem to be explained by the implications of pandemic-induced uncertainty for the future cash flows of these firms.The central bank’s surprise policy package announced right after the lockdown seemed to have reversed the adverse impact of the lockdown in the short-term