Stock Returns Under the Shadow of the Covid-19 Pandemic : Evidence from China

We investigate the impacts of new COVID-19 infections on stock returns within China's unique zero-COVID policy framework. We document a remarkable negative pattern: a COVID-19 outbreak within a city adversely affects the performance of local firms in a nonlinear fashion. This effect intensifies as the outbreak's severity increases, spills over to neighboring cities, and is transmitted through both cash flow and discount rate channels. Firms with significant retail exposure are most vulnerable, while firms with low pandemic exposure, larger size, state-owned enterprise (SOE) status, and robust finances demonstrate greater resilience to the COVID-19 effect. Lastly, supplementary back-of-the-envelope calculations illustrate the substantial economic consequences of these phenomena