The Long Shadow Beyond Lockdown: Board Chairs’ Professional Epidemic Experience and Corporate Investment

The coronavirus pandemic has caused great damage to the global economy, due to the disease itself and the subsequent local and country-wide lockdowns to contain it. While recent investigations have focused on the short-term impact of COVID-19 and the lockdowns, the long-term impact, especially the ways that epidemic experience affects managerial decision making, has received far less attention. In this blog post, we introduce the results from our recent working paper in which we explore the long-term impact of a pandemic by studying the case of the 2003 Severe Acute Respiratory Syndrome (SARS) epidemic in China, which was caused by the same family of viruses as COVID-19. We show that firms whose board chairs experienced the outbreak of SARS during their tenure reduced capital expenditures, property, plant, and equipment in particular, a major type of corporate long-term investment, in subsequent periods. Furthermore, we found those firms became more conservative in undertaking new projects or investment, which harmed long-term economic growth.

How do epidemics affect managerial decision making?

While epidemics and subsequent lockdowns can result in a sudden collapse of aggregate demand, epidemics can also significantly weaken consumer and investor confidence. While consumers may quickly resume confidence and compensate for their reduction in consumption, it may take a longer period for investors to restore their confidence and resume long-term investment. Because epidemics occur abruptly, and severely constrain real economic activity, they pose unique challenges to firms’ leadership. Under these circumstances, managerial decision making is influenced by probability weighting—a judgment heuristic whereby individuals overweight the probability of extreme tail events. If managers disproportionately weight large losses suffered during previous epidemics, they may overestimate the true probability of investment failure. Hence, investment projects, especially those with a small probability of large loss, and a large probability of small gain, can become undervalued. As a consequence, entrepreneurs and managers may forgo investment projects that are otherwise profitable, resulting in underinvestment across the entire economy.

Why compare COVID-19 to SARS?

Due to the limited data on COVID-19, recent studies mostly focus on the analysis or prediction of its short-term economic consequences. The long-term economic consequences of the probability weighting phenomenon on corporate investment policies has received far less attention. To bridge this gap, we choose to study the case of the 2003 SARS outbreak in China for the following reasons. Firstly, SARS and COVID-19 are caused by the same family of virus, so they have similar features in terms of symptoms and pathology. Like COVID-19, SARS spread primarily from person to person through droplets that enter the air when an infected person coughed, sneezed, or talked. SARS first appeared in China in November 2002 and, within a few months, spread worldwide by unsuspecting travelers. In 2003, there were more than 8,000 SARS cases that affected 26 countries. Secondly, SARS and COVID-19 led to similar lockdowns in China, as people opted to stay home to reduce the probability of infection and the government closed theaters, and other business places to contain the spread of SARS. The negative impact of SARS on economic growth in China during the epidemic is shown below.


Our Findings

Furthermore, we found that the reduction in capital expenditures was more pronounced in situations in which board chairs were more likely to recall negative outcomes of the epidemic and overweigh the probability of tail events. These situations are more likely to occur when epidemic outbreaks are significant, when firms are not owned by the state, when firms are smaller, and during periods of higher economic policy uncertainty. We also found that professional epidemic experience mattered more for board chairs that experienced operating distress during the outbreak of SARS, suggesting that living through a period of operational distress has great explanatory power for post-epidemic investment decisions.

Implications for the Economic Effects of COVID-19

Our study provides useful implications for the economic effects of COVID-19. After the outbreak of COVID-19, governments in many countries took immediate actions not only to contain the spread of disease but also to stimulate the economy. Though various expansionary policies were conducted in response to the pandemic, we have not yet seen strong economic recoveries in most countries and the effectiveness of expansionary monetary policy and fiscal policy may be dampened after the epidemic. While recent investigations focus on the collapse of demand due to the epidemic and lockdowns, we highlight a second collapse of demand due to entrepreneurs’ decreasing investment propensity in post-epidemic periods. This long-term impact is more enduring and has great explanatory power for the decreasing effectiveness of expansionary policies.

Consequently, we suggest that policy makers devote more attention to this long-term impact and restore entrepreneur confidence. Firstly, governments should improve healthcare infrastructure to lower the probability of similar extreme tail events. This would make entrepreneurs less likely to recall the negative outcome of epidemics and thus remit the effect of probability weighting phenomenon. Secondly, governments should conduct more accurate policies to lighten the burdens on enterprises. Those policies include tax cuts and reductions in financing cost, which will improve firms’ investment propensity, thus stimulate corporate investment in the long run, and speed up the post-COVID pandemic economic recovery.

Shan He is a PhD candidate in economics at School of Finance and research assistant at Belt & Road Finance Institute of Central University of Finance and Economics.

Jianjun Li is the dean and professor of School of Finance and director of Belt & Road Finance Institute of Central University of Finance and Economics.

Xiaoran Ni is an assistant professor at Department of Finance, School of Economics and Wang Yanan Institute for Studies in Economics (WISE) of Xiamen University.

Yuchao Peng is an associate professor at School of Finance and executive director of Belt & Road Finance Institute of Central University of Finance and Economics

This post is adapted from their paper, “The Long Shadow beyond Lockdown: Board Chairs’ Professional Epidemic Experience and Corporate Investment”, available on SSRN.



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