Discussion Paper Details

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Title: Outlasting the Pandemic: Corporate Payout and Financing Decisions During Covid-19

Author(s): Davide Pettenuzzo, Riccardo Sabbatucci and Allan Timmermann

Publication Date: May 2021

Keyword(s): announcement effect on stock prices, bond and equity issues, corporate actions, Covid-19 pandemic, dividend suspensions and Share repurchases

Programme Area(s): Financial Economics

Abstract: The outbreak of the Covid-19 pandemic massively increased uncertainty about firms' cash flows and access to financial markets. We examine its effect on firms' strategies for preserving cash by suspending dividends and share repurchase programs and raising new funds through bond and equity issues. Our estimates suggest that between March and December 2020 US firms saved a combined $86bn by suspending or reducing dividend payments and another $140bn from suspending buybacks. We identify a short list of firm and stock characteristics that explain most of the cross-sectional variation in firms' payout and financing decisions. We show that the expansive monetary policies pursued by the Federal Reserve in the early phase of the pandemic crucially affected the timing and sequencing of firms' decisions. Announcement effects on stock returns were highly unusual during the pandemic as dividend and buyback suspensions were associated with a more rapid recovery in firms' stock prices, consistent with investors interpreting them as prudent actions that helped reduce risks.

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Bibliographic Reference

Pettenuzzo, D, Sabbatucci, R and Timmermann, A. 2021. 'Outlasting the Pandemic: Corporate Payout and Financing Decisions During Covid-19'. London, Centre for Economic Policy Research.