How Valuable is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis

Firms with greater financial flexibility should be better able to fund a revenue shortfall resulting from the COVID-19 shock and benefit less from policy responses. We find that firms with high financial flexibility experience a stock price drop lower by 26% or 9.7 percentage points than those with low financial flexibility accounting for a firm's industry. This differential return persists as stock prices rebound. Similar results hold for CDS spreads. The stock price of a firm with an average payout over assets ratio would have dropped 2 percentage points less with no payouts for the last three years