Financial Flexibility and Stock Return of Brazilian Companies: Evidence During The COVID-19 Crisis

 

Abstract

Objective: The objective was to verify the effect of financial flexibility on the value of shares of Brazilian companies during the pandemic period caused by COVID-19.

Background: Financial flexibility is associated with the ability of a company to face financial diffi-culties, but there are still no studies in Brazil that show its relationship with the value of shares in periods with a shock to companies’ revenues.

Method: Regression analysis was applied to a cross-section of data with 102 companies listed on the Brazil Broad Index (IBRA). Two economic periods of the pandemic were considered, the col-lapse, between 2/2/2020 and 3/23/2020, and the stimulus to the economy, on 3/24/2020.

Results: The evidence show that in the period of economic collapse, the financial flexibility due to debt capacity proved to be valuable for companies, especially for those most affected by COVID-19, which had more pronounced reductions in revenues in the first half of 2020. We have also ob-served that the level of cash retention had no impact on stock returns during the collapse period. On the date of economic stimulus, the companies’ cash level showed a positive relationship with the value of shares, but there were no evidence that this appreciation occurred for companies with more affected revenues.

Contributions: This study contributes to the literature by verifying the impact of financial flexibil-ity on the value of shares of Brazilian companies during two different economic moments of the pandemic, namely: the collapse and the stimulus to the economy.