The COVID-19 outbreak has massively disrupted the life of individuals and imposed huge financial costs on almost all firms. As first diagnosed by Ramelli and Wagner (2020), on February 24, the U.S. stock market started to oscillate wildly and many firms saw much of their equity destroyed by the COVID-19 crisis.
A lot of attention has been devoted to understanding the determinants of stock returns during the COVID-19 crisis, similar to the responses to the 2008 global financial crisis. Recent studies, mainly on the U.S. stock market, have highlighted the role of financial flexibility, global supply chains, corporate social responsibility, and corporate governance. Although France was later than the U.S. on the epidemic curve (the first COVID-19 case in France and in Europe was confirmed on January 24), the French stock market started to fall on February 20. By mid-March 2020, the CAC 40, the major index of the French stock market, had dropped 40%.
In a recent paper, we investigate the determinants of the resilience of French publicly listed companies to the COVID-19 crisis. We study a sample of 437 French companies over the period of February 20 to March 16, during which the average French public company experienced a stock price drop of more than 34% .
This drop is very similar to the figures reported for the U.S. stock market. Nevertheless, it is interesting to compare the similarities and differences in determinants of stock returns during the COVID-19 crisis in the two countries. For example, both the U.S. and French governments announced economic stimulus packages in response to the damage caused by COVID-19. However, each country has notable differences in the organization of its labor market and health system.
Determinants of Stock Returns in France and the U.S. during COVID-19
Controlling for standard determinants of the cross-section of stock returns (this includes the CAPM beta, the book-to-market ratio, the natural logarithm of market capitalization, and industry fixed effects) we document several findings for the French stock market.
First, French companies with more debt and less profitability experienced worse stock returns. This finding is consistent with studies focusing on the U.S. stock market (e.g., Fahlenbrach et al. 2020; Ramelli and Wagner 2020). In the cross section, all else equal, a one-standard-deviation increase (decrease) in financial leverage (profitability) is associated with a larger stock price drop of about 3 percentage points. Both in France and in the U.S., the impact of the COVID-19 shock is magnified for firms with weak balance sheets, while firms with greater financial flexibility are better able to fund themselves through the revenue shortfall caused by the pandemic.
Second, French companies with greater environmental or social performance do not experience better stock returns during the COVID-19 shock, in contrast with studies based on U.S. or international samples (e.g., Albuquerque et al. 2020; Ding et al. 2020; Garel and Petit-Romec 2020). The absence of results for the French market is consistent with CSR, in particular, employee-related CSR, which is more value-enhancing in flexible labor markets, such as the US and UK, than in rigid labor markets, such as France (Edmans et al. 2014).
Third, most aspects of corporate governance do not seem to be associated with COVID-19 crisis returns for French companies. Interestingly, we find some evidence that firms with greater board independence experienced worse returns. This result is consistent with research suggesting that the advisory role of boards is more important than the monitoring role in an unprecedented crisis such as the COVID-19 shock (Adams and Ferreira 2007).
Fourth, our study on the French stock market highlights the key role played by the ownership structure, which to the best of our knowledge has not been studied for the U.S stock market. French companies that are mostly held by short-term investors or active investors experienced worse stock returns during the COVID-19 shock than companies held by long-term investors. This result echoes similar findings on the relationship between ownership structure and stock returns documented for the 2008 global financial crisis for U.S. firms and banks (Cella, Ellul, and Giannetti 2013; Garel and Petit-Romec 2017). We also find that firms with greater ownership by the French government or related institutions experience worse stock returns, as investors anticipate that these firms will take pro-employee rather than pro-shareholder decisions (Bertrand et al. 2018).
Finally, our analysis of stock price reaction to the announcements of policy responses to the COVID-19 crisis shows that, as in the U.S, French companies with more debt benefit to a larger extent from the stimulus package. Support from the French government was conditioned on a commitment of waiving dividend payments. As such, we also find that investors penalized dividend-paying companies.