Abstract

۱٫ Introduction

۲٫ Data

۳٫ Identification strategy

۴٫ Empirical results

۵٫ Conclusion

CRediT authorship contribution statement

Declaration of competing interest

Acknowledgments

References

Abstract

     We study the effects of epidemic diseases on corporate investment. Epidemic diseases tend to be unanticipated and exogenous to firms’ decisions. Using difference-in-difference estimation strategy and a firm-level exposure to an epidemic disease measure, we find that corporate investment declines significantly following the onset of an epidemic disease. We also show that the COVID-19 pandemic has the strongest negative impact on investment when compared to the other most recent epidemic diseases.

Introduction

     The extant literature has focused on macroeconomics shocks and their impacts on corporate real decisions.1 But little attention has been paid to the effects of epidemic-induced shocks on corporate decisions. Epidemic diseases tend to be unexpected and are exogenous to firms’ real decisions. The potential widespread of an epidemic disease impacts firms’ willingness to take on risks during a market wide shock; creating financing frictions which affects the relative attractiveness of current period’s investments vis-a-vise future investments. Managers might delay investments in the face of epidemic-induced market wide uncertainty shock.

     In this paper, we focus on the impact of epidemic diseases on corporate investment amongst U.S firms. We focus on the five most recent epidemic diseases: COVID-19, SARS, H1N1, Ebola and Zika virus. To test our hypothesis, we employ two estimation strategies. First, since not all firms are impacted equally during an epidemic-induced shock, we use a firm-level measure of exposure to an epidemic disease extracted from Hassan et al. (2021). Second, so as take into account the aggregate effects of epidemic diseases, we use staggered difference-in-difference estimation strategy. Our second approach effectively compares the investment of firms before and after the onset of an epidemic disease. We find that corporate investment declines on average by about 7% to 10% relative to the unconditional mean, following the onset of an epidemic disease. We also find that COVID-19 has the strongest negative impact on corporate investments when compared to the other most recent epidemic diseases under study. Our results show that not all epidemic diseases are created equal; the duration and intensity of an epidemic disease are important considerations when evaluating the potential impacts on firms’ real decisions.

Conclusion

     “Do epidemic-induced shocks affect corporate investments?” We argue that epidemic diseases are generally unanticipated and their impacts can be widespread leading to uncertainty, increasing financing frictions and thus affecting the relative attractiveness of current period’s investments when compared to future periods’ investments. In anticipation of fluctuations in aggregate demand and supply, managers might delay investments as the option to do so during a period of high uncertainty is valuable.

     Using difference-in-difference estimation strategy and a firm-level exposure to an epidemic disease measure, we find that corporate investment declined significantly following the onset of an epidemic disease. We also document that the COVID-19 pandemic has the strongest negative impact on investments when compared to the other most recent epidemic diseases. Our results show that epidemic-induced shocks have first-order effect on corporate decisions.