Pandemics, Vaccines and an Earnings Damage Function

Harrison Hong, Jeffrey D. Kubik, Neng Wang, Xiao Xu, Jinqiang Yang

NBER Working Paper No. 27829
Issued in September 2020, Revised in February 2021
NBER Program(s):Asset Pricing, Corporate Finance

We derive a parsimonious model of damage to corporate earnings from COVID-19. Using measures of expected damage from industry-level earnings forecast revisions, we estimate this model with nonlinear least squares and identifying restrictions related to forecast rationality. Forecasts in mid-May 2020 imply an earnings crash and lower earnings growth until a vaccine arrives in 1.48 years (95% CI [0.61, 5.88]). We extend our framework to account for time-varying vaccine arrival rates. Mid-August 2020 forecasts imply a vaccine arrival in 0.61 years (95% CI [0.35, 1.06]), which is due to positive vaccine news as opposed to fiscal or monetary policy news.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w27829