Does Real Flexibility Help Firms Navigate the COVID-19 Pandemic?
The British Accounting Review
; : 101148, 2022.
Article
in English
| ScienceDirect | ID: covidwho-2122333
ABSTRACT
Building on the investment-based asset pricing framework, we show that firms’ ability to timely scale down their operations reduces the sensitivity of their equity value to large adverse productivity shocks. Using U.S. data in the times of the COVID-19 pandemic, we provide empirical evidence consistent with our model’s predictions. Real flexibility curbs losses in firm value and reduces return volatility, especially for firms with high book-to-market or high COVID-19 exposure, consistent with the idea that the benefits of real flexibility are associated primarily with contraction options during the COVID-19 crisis. Our analysis shows that real flexibility provides incremental and complementary protection beyond financial flexibility. Besides its impact on stock prices, real flexibility also helps firms sustain earnings during 2020, compared with 2019 when the pandemic had not struck. Our work demonstrates that real flexibility is an important tool for corporate managers in navigating episodes of disasters.
Full text:
Available
Collection:
Databases of international organizations
Database:
ScienceDirect
Language:
English
Journal:
The British Accounting Review
Year:
2022
Document Type:
Article
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