French Firms and COVID-19: Do the Debt Status, Crisis Management System, and Monetary Policy Play a Role?

1 Introduction

The broad literature that concerns the capital markets reveals that the stock market returns are responsive to various major events. Historically, such returns are always affected by environmental circumstances (Degiannakis et al. 2013; Limkriangkrai et al. 2016), political events (Charfeddine and Al Refai 2019) and disasters (Capelle-Blancard 2010; Kowalewski and Śpiewanowski 2020).

The spread of worldwide pandemics such as H1N1, SARS, EVD, and COVID-19 is one of this century’s main features. Therefore, several studies appeared to assess these events’ impact on the stock market returns (Sharif et al. 2020). However, this research area is still in progress, mostly if we focus on the firms’ sector of activity, crisis management system, and debt status after the spread of COVID-19. Compared to the studies currently in progress, this study aims to examine four main questions: How does the COVID-19 affect the listed firms’ stock market returns in France? Which sectors are the most vulnerable to respond negatively to pandemics? How does the pandemic impact the firms that are more committed to long a debt status relative to the firms with a short-term debt status? Does the crisis management system play a significant role in reducing the pandemic’s adverse effect on the stock returns?

On January 24, 2020, the first case of coronavirus in Europe was detected in Bordeaux, France, with Chinese tourists (Bernard-Stoecklin 2020). On February 14, Paris city recorded the first death outside Asia and Europe (France Info 2020). By March 17, the government announced quarantine, borders were closed, and economic activity diminished. By the first quarter of the year, France suffered from a recession (INSEE 2020). Since May 11, the country’s lockdown has been relaxed, and economic activity has started to catch-up. However, the COVID-19 outbreak has adversely affected investments and business activity in France.

This study assumes three central hypotheses: First, COVID-19 has precise results on the sector of activity in which it operates. Some sectors are expected to be less affected such as the telecommunication sector. In contrast, others are expected to be substantially affected, such as the industrial and energy sectors. According to Bloom et al. (2018), different sectors are likely to respond disproportionately to unexpected major events, including the outbreak of pandemics. Second, the adverse pandemic effect is much more tolerant with the firms with less long-term debt commitments.

Furthermore, capital structure literature suggests that debts are an essential source of finance; however, it may significantly impact the firm’s financial obligations (D’Amato 2019; Sami et al. 2020). During a pandemic, the profitability indicators are very likely to change, and sometimes the firm may face a period of loss. If we consider the expected loss and the burden of the firms’ debt commitments, the situation is expected to be more complicated. When the long-term debt commitments are low, the pandemic’s negative effect on the stock returns is expected to be much more tolerant. Third, crisis management plays a vital role in reducing pandemics’ negative impact on the listed firms’ stock returns. Crisis management allows firms to adopt various strategies that guarantee the best management practices implementation such as scenario planning, efficient communication from managers to employees, identifying the market gaps that help to reposition the firms in the market (World Bank 2020).

This study’s originality is to assess pandemics’ impact, especially COVID-19, on the listed firms’ stock market returns in France. In particular, this assessment (1) distinguishes the effect across the different sectors in the economy (2) investigates the role of the debt status and crisis management in reducing the adverse impact of the pandemic on the stock returns (3) explores the role of Euribor rates and monetary policy during pandemic periods.

The rest of the paper is organized as follows. The next section presents the related Literature Review. Section 3 provides data and descriptive statistics. The fourth section presents the methodology and empirical results. Robustness Checks are presented in section 6, followed by the conclusion.

2 Literature Review

The Stock market is considered as one of the most responsive markets for major unexpected events (He et al. 2020). The existing research papers on the impact of major events on the economy and financial markets has consistently focused on political and security affairs, natural disasters and financial crises (Al-Awdahi et al. 2020; Capelle-Blancard 2010; Charfeddine and Al Refai 2019; Kowalewski and Śpiewanowski 2020; Zhang et al. 2020).

However, there exists a limited number of research papers that focus on unexpected health events. Some studies focus on the regional/specific country effects, for example, Chen et al. (2018) showed that SARS harms the financial markets in the Asian region. Using a panel of 48 countries, Barro et al. (2020) found that the coronavirus and the Great Influenza pandemic negatively affected the stock returns, especially the government bills. Akhtaruzzaman et al. (2020) examine the impact of the COVID-19 outbreak on the financial correlation between China and G7 countries, where they found a dynamic correlation in the financial markets in this region (Al-Awadhi et al. 2020).

While other studies focus on some industries, Sobieralski (2020) focused on the airline industry and demonstrated the critical losses for the airline labor in the United States after the COVID-19. The study of Ayati et al. (2020), concerned with the pharmaceutical sector, showed what the industry has suffered from a slowdown in growth due to COVID-19.

Furthermore, the sector is expected to assist significant shifts in the long run due to the lessons learned from this pandemic. Qin et al. (2020) focused on the Oil industry sector, which showed that this sector is one of the top sectors that assisted substantial adverse shocks due to COVID-19.

This paper extends the previous literature review by (1) considering France, which has been somehow overlooked by the current studies, as the center of the study (2) studying the impact of the pandemic on the different sectors of the economy (3) investigating the role of the crisis management system and debt status during the major pandemic shocks.

3 Data and Descriptive Statistics

Data has been exported from the Eikon Reuters Database (2020) on listed firms in France,^[1] covering the period from January 23, 2020, to October 30, 2020. The data already includes information for each French firm daily, such as stock market returns, market value and employees. Other firm-level invariant time variables were used, such as the sector of activity, long term debt to market capitalization and crisis management practices. This latest data has been compiled with daily data on COVID-19 exported from www.ourworldindata.org (Roser et al. 2020) for the same period. Finally, daily Euribor rates have been implemented to show the response of stock market returns to changes in the borrow funds rate. Euribor rates data were obtained weekly from the European Banking Federation Internet page at www.euribor.org. Hence, Table 1 presents a summary of sources and the exact definition and measurement of each variable.

Figures in Appendix present the firm variables’ variation within the firm’s average and over time (Figures A1, A2, and A3). In contrast, the other figures demonstrate the change of the variables over time (Figures A4, A5, and A6). The firm variables have been widely affected over time, especially for March 2020 and May 2020, which includes a significant increase in the new deaths due to COVID-19 (Figure A6).

For the other variables, the monetary policy variable shows that Euribor and the stringency index rates have been changing throughout the COVID-19 period (Figure A4). It is clear that the government adopted changes in rules according to the new cases/deaths during the pandemic crisis, and we note that the stock returns started to decrease significantly, starting from March.

Table 2 presents the data’s statistics excluding the top and least 1% stock returns that showed extreme change. It shows that the stock market returns are highly volatile, reaching a peak of 16% and a trough of −12.28. However, the other variables, which are on the firm-level, are dynamically changing, such as the market value variable. In contrast, the employee’s variable is considered the least dynamic variable. As a result, having a closer look at Euribor rates, it is evident that the rates were changing during this period, where the change rate decreased to −8.88% (from the last week of March to the first week of April). The growth in new cases reached 1640.91% (from May 28 to May 29) and a minimum of −326.63% (from June 2 to June 3). As a result, the same variation is valid for the growth in death cases ranging from −100 up to 1800%. Consequently, Table A.2 in Appendix provides the correlation between the variables used in the study.

4 Methodology and Empirical Results

5 Empirical Analysis Based on Sectors, Long Debt Status, and Crisis Management

6 Robustness Checks

As a robustness check, the author uses daily new cases per 100,000 population instead of growth in daily new cases.^[2] An interaction term between stringency index and new death cases per 100,000 population variables is constructed to identify government policies’ effect given the pandemic’s spread in France.

Table 7 presents the main results using the number of new cases per 100,000 and demonstrates government policies’ effect by interacting this variable with the number of deaths one. The results in column (2) show that for each 100,000 increase in new cases, the stock market returns decrease by 0.014%. Moreover, the stringency index’s government policies are still efficient during the COVID-19 period (column 3). Conspicuously, the strict policies (e.g., stay at home) by the government can positively affect the stock market returns given the increase of the pandemic’s effect in France.

Table 8 reaches the same results provided by Table 4, where Panel (A) shows that the health care, industrial and energy sectors are the sectors that are the most adversely affected by the spread of the pandemic. Everything held constant, for every 100,000 new cases: (1) the stock returns of the energy sector decreases by 0.055% (2) the stock returns of the industrial sector decreases by 0.014% (3) the stock returns of the health care sector decreases by 0.023%. On the other hand, Euribor rates still play an essential role in determining the stock market returns of the companies operating in consumer goods, industrial, and energy sectors.

Having a closer look at Panel (B), although the pandemic has considerably spread, the stringency index shows that it is positively affecting the stock returns of the consumer goods, health care, and the industrial sectors. On the other hand, the pandemic’s effect turns to be insignificant for the basic materials, consumer services, telecommunication and energy sectors.

Table 9 provides the same results offered by Table 5. Panel (A) includes the firms with the lowest long-term debt as a percentage of market capitalization in the year preceding the pandemic disease (mainly the least 25% of firms). In comparison, Panel (B) has all the firms with long-term debt status as a percentage of market capitalization (mainly the top 25%). The results show that the more committed firms to long-term debt are adversely affected by the pandemic’s effect (columns 3 and 4), while the less committed firms to long-term debt are less affected (columns 1 and 2). On the other hand, the stringency index plays an essential role in reducing low and high debt firms’ adverse effects.

Table 10 provides the results of the crisis management system during the pandemic crisis. Panel (A) provides the consequences related to the firms that do not have a crisis management system, while Panel (B) reports the results of the firms who have this system. As previously noted, the number of observations is limited for this variable, and results should be interpreted with precautions. Columns (1) and (3) show insignificant coefficients for the two panels. Column (2) and Column (4) show that the stringency index during the spread of a pandemic is vital for the two panels of firms. However, this variable’s effect is much more critical for firms without a crisis management system. The firms with this system are already facing higher losses from the pandemic than the firms that do not have a crisis management system. Therefore, any government action may alleviate the pandemic’s adverse impact on the group of firms that do not have a crisis management system relative to the group who have this system.

7 Conclusion

This study provides three main results: (1) The COVID-19 has adversely affected the stock market returns for the listed firms in France. However, the sectors of the economy did not respond in the same manner. The results show that the energy, industrials, and health care sectors are the most negatively affected, while the telecommunication and consumer services sector were not affected. This finding goes in parallel with the first hypothesis of the study. (2) The firms that were less committed to long-term debts performed better than the firms with many long-term commitments (Hypothesis 2 of the study). (3) The crisis management system plays an essential role in reducing the pandemic’s adverse shocks on the stock returns. In particular, the results show that the firms that have a crisis management system are performing better than the firms that do not have such a system (Hypothesis 3 of the study). (4) Monetary policy in Europe is still an essential resort during pandemics to face the negative consequences, especially for the energy, industrials and consumer goods sectors.

This study suggests that all economic system players should adopt several policy implications to reduce the pandemic’s adverse effect on the economy and the financial market. The management should consistently guarantee an efficient crisis management system to face unexpected major events on the firm level. In addition to this, knowledge management within firms is essential to provide plans to support the firm against the crisis (Sami and El Bedawy 2019). Thus, different strategies should be adopted to face debt commitments when the firm experiences a period of shock.

On the macro level, results suggest that the government can still play two major roles through the monetary policy and the stringency of applying rules to reduce the pandemic’s spread. The monetary policy is mainly affecting three strategic sectors: energy, industrials and consumer goods. On the other hand, the government’s stringency is vital to save the market and the firms from collapsing. Furthermore, the most negatively affected sectors require prompt support from the government.

Further research should focus on the pandemic’s impact by considering other firm indicators such as total factor productivity, marketing strategy and innovation. Some studies assume that the firms may reposition themselves after this pandemic period (Ayati 2020); therefore, more research on the market shifts and structural changes before and after the COVID-19 pandemic is necessary. It is also essential to study alternative investments that can be adopted during and after this period, such as Bitcoin usage (Sami and Abdallah 2020a, b). Finally, more studies should be done to reflect the impact of COVID-19 on individuals; for example, introducing the linkage between these crises and remittances is a critical question (Ayad and Abd El Aziz 2018).