Firm-Level Risk Exposures and Stock Returns in the Wake of COVID-19

Steven J. Davis, Stephen Hansen, Cristhian Seminario-Amez

NBER Working Paper No. 27867
Issued in September 2020, Revised in February 2021
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

Firm-level stock returns differ enormously in reaction to COVID-19 news. We characterize these reactions using the Risk Factors discussions in pre-pandemic 10-K filings and two text-analytic approaches: expert-curated dictionaries and supervised machine learning (ML). Bad COVID-19 news lowers returns for firms with high exposures to travel, traditional retail, aircraft production and energy supply—directly and via downstream demand linkages—and raises them for firms with high exposures to healthcare policy, e-commerce, web services, drug trials and materials that feed into supply chains for semiconductors, cloud computing and telecommunications. Monetary and fiscal policy responses to the pandemic strongly impact firm-level returns as well, but differently than pandemic news. Despite methodological differences, dictionary and ML approaches yield remarkably congruent return predictions. Importantly though, ML operates on a vastly larger feature space, yielding richer characterizations of risk exposures and outperforming the dictionary approach in goodness-of-fit. By integrating elements of both approaches, we uncover new risk factors and sharpen our explanations for firm-level returns. To illustrate the broader utility of our methods, we also apply them to explain firm-level returns in reaction to the March 2020 Super Tuesday election results.

Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w27867