Implied Equity Duration: A Measure of Pandemic Shutdown Risk

Abstract

Implied equity duration was originally developed to analyze the sensitivity of equity prices to discount rate changes. We demonstrate that implied equity duration is also useful for analyzing the sensitivity of equity prices to pandemic shutdowns. Pandemic shutdowns primarily impact short‐term cash flows, thus they have a greater impact on low‐duration equities. We show that implied equity duration has a strong positive relation to U.S. equity returns and analyst forecast revisions during the onset of the 2020 COVID‐19 shutdown. Our analysis also demonstrates that the underperformance of “value” stocks during this period is a rational response to their lower durations.

Withdrawal of Management Earnings Guidance During the COVID-19 Pandemic

“…While both stoppage and withdrawal of guidance reduce the amount of public information, the latter is conceptually different because the firm has previously publicly committed to an earnings target-only to announce later that it is no longer doing so. Extending the limited literature on guidance withdrawal (Lee and Van Buskirk 2017;Marshall and Skinner 2020), we document that firms withdraw guidance when faced with pandemic-driven adverse conditions, with factors such as litigation risk and product market competition playing a role 4 For example, Dechow et al (2021) show that implied equity duration, which they argue is useful for analyzing the sensitivity of equity prices to pandemic shutdowns, has a strong positive relation to U.S. equity returns and analyst forecast revisions during the onset of the shutdown due to the pandemic. 5 We note that many papers in the voluntary disclosure literature focus on how firm-level conditions affect voluntary disclosure decisions.…”

“…Our paper contributes to the literature in two important ways. First, it extends the understanding of corporate consequences of the pandemic, which has inspired an emerging stream of studies examining its implications on the economy, corporations, and individuals (e.g., Baker, Bloom, Davis, and Terry 2020;Ding, Levine, Lin, and Xie 2020;Hassan, Hollander, Van Lent, and Tahoun 2020;Dingel and Neiman 2020;Dechow, Erhard, Sloan, and Soliman 2021). 4 Our study, motivated by concerns from regulators and practitioners about corporate disclosure during the pandemic, complements these recent studies by focusing on firms' guidance withdrawal as a consequence.…”

The market reaction to COVID-19: European Evidence

“…Crovini et al (2021) highlight the paramount importance of identifying and assessing risks related to COVID-19 spread should be a common risk reporting practice to enhance dynamic accountability. Lastly, a stream of literature (Xu, Chen, Zhang, and Zhao (2021); Chatjuthamard, Jindahra, Sarajoti, and Treepongkaruna (2021); Dechow, Erhard, Sloan, and SOLIMAN (2021)) examines the connection of market sentiment and the effect on COVID-19 on stock returns. Xu et al (2021) find that stock market response to specific information is decelerated by the public attention and accelerated by the infection scale and draw the general conclusion that COVID-19 outbreak distorts stock price incorporation of firm specific information and affects price discovery efficiency in a heterogeneous manner.…”

“…Another bunch of studies (Yu, Chu, Ding, and Zhao (2021);De Vito and Gomez (2020); Huang and Ye (2021); Crovini, Schaper, and Simoni (2021)) analyzes the risk contagion and risk liquidity associated with COVID-19. Lastly, other researchers ( (Xu, Chen, Zhang, and Zhao, 2021); Chatjuthamard, Jin-dahra, Sarajoti, and Treepongkaruna (2021); Dechow, Erhard, Sloan, and SOLIMAN (2021)) examined the connection of market sentiment and the effect on Covid on stock returns. Extant literature though has not examined the market reaction and the long run market effects of the pandemic.…”

The role of non-critical business and telework propensity in international stock markets during the COVID-19 pandemic

“…Alfaro et al (2020) present results in the same direction, COVID-19 related losses in the market value of U.S. listed companies rise with leverage and are more profound in industries more conducive to disease transmission. Dechow et al (2021) complement showing that pandemic shutdowns primarily impacted short-term cash flows of U.S. listed firms. They demonstrate that the underperformance of value stocks during this period is a rational response to their lower durations.…”