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The invisible business risk of the COVID-19 pandemic

Are pandemics systemically important to modern-day financial markets? It is not obvious how a financial market’s myriad interconnected parts would react to a pandemic-induced supply and demand shock. This column shows that the COVID-19 pandemic triggered unprecedented changes in employment levels and the values of stocks, bonds, commodities, and currencies. Corporate managers also systematically underestimated their business-model exposure to pandemics in their annual report risk factors.

Attesting to the economic significance of the COVID-19 pandemic, central banks and governments across the globe have recently implemented large economic stimulus plans to prop up their respective economies (Baldwin and Weder di Mauro 2020). We know from prior research that there are severe health and economic implications of pandemics at the individual level (e.g. Acemoglu et al. 2003, Almond and Mazumder 2005). However, there is limited research on the immediate effects of pandemics on the financial system. 

It is not obvious how the financial system’s myriad interconnected parts would react to a large pandemic-induced supply and demand shock. In a recent study, I examine whether, and to what extent, pandemics pose a serious risk to the financial system (Schoenfeld 2020). I also examine whether managers anticipated pandemic risk using firms’ risk factors in their annual reports. Although my study focuses mainly on data from the US, it is clear from media reports and other sources that many of the results easily generalise to other countries.

The impact of the COVID-19 pandemic on asset prices

I first examine the pandemic’s effect on the stock market. I observe the largest decreases in firm value for petroleum and natural gas firms, apparel firms, restaurant and hotel firms, automobile firms, transportation firms, machinery firms, and aircraft, ship, and railroad firms. By contrast, I observe smaller decreases in firm value for food product firms, healthcare firms, utility firms, and business services firms. The firms with the largest decreases in value at the pandemic's onset include Norwegian Cruise Lines (-86.0% change in value), Noble Energy (-83.7%), Royal Caribbean Cruises (-83.4%), Halliburton (-80.6%), and Carnival (-80.5%). A small set of firms also increased in value at the pandemic’s onset, suggesting that investors might be expecting increased demand for these firms’ goods and services. This group of firms includes Walmart (+0.4%), General Mills (+3.0%), Netflix (+0.6%), Clorox (+26.0%), and Regeneron Pharmaceuticals (+31.2%).

Other asset classes were also impacted by the pandemic. Government bonds increased in value as central banks cut benchmark interest rates and unveiled large bond-buying programmes. Although the Federal Reserve also committed to purchasing corporate bonds, the S&P corporate bond index decreased in value, presumably because of heightened credit risk among investors. Many commodities also decreased in value, particularly oil and natural gas. Gold, by contrast, increased in value. The US dollar also strengthened relative to several foreign currencies.

COVID-19 and employment

The pandemic also significantly impacted the labour market. According to the US Department of Labor, for the week ending 21 March 2020, seasonally adjusted initial unemployment claims were 3,307,000, an increase of 3,025,000 from the previous week’s level of 282,000. This was the highest level ever for such claims, but that number was surpassed in the week ending 28 March 2020, when it reached 6,480,000 (and again in the week after that).

Corporate managers systematically underestimated their exposure to pandemics

I next examine whether managers anticipated their exposure to pandemics by hand collecting and reading the risk factor section (‘Item 1A’) of the annual reports for all firms in the S&P 500 as of January 2020. By regulator mandate, firms’ risk factors are required to include “information about the most significant risks that apply to the company or to its securities”. Under this mandate, managers can be sued for violating their obligation to disclose value-relevant information.

I find that about 46% of these firms included pandemics (or related risks such as diseases or health crises) in their risk factors leading up to the COVID-19 pandemic’s onset. To illustrate, Norwegian Cruise Lines includes the following in its risk factors:

Epidemics and viral outbreaks could have an adverse effect on our business, financial condition and results of operations. Public perception about the safety of travel and adverse publicity related to passenger or crew illness, such as incidents of viral illnesses, stomach flu or other contagious diseases, may impact demand for cruises and result in cruise cancellations and employee absenteeism. If any wide-ranging health scare should occur, our business, financial condition and results of operations would likely be adversely affected.

Given that 46% of the firms in S&P 500 included pandemics in their business risk factors, any financial impact from a pandemic should, insofar as these risk factors are accurate and complete, be largely contained to these exposed firms. However, about 95% of the S&P 500 firms decreased in value from January to March 2020. In fact, the 54% of firms that did not include pandemics in their risk factors exhibited a mean decrease in value of 32% from January to March. The magnitude and sign of this result almost exactly equal the 32% mean decrease in value exhibited by firms that did include pandemics in their risk factors. On aggregate, these findings translate to an economic loss of $18 billion per firm on average, or about $9 trillion in total for S&P 500 firms alone. These results are robust to a variety of buy and hold return periods.

In addition, whether a firm included pandemics as a risk factor does not significantly correlate with (or predict) its return volatility or the signed magnitude of its change in value at the pandemic's onset. This null result also obtains for measures akin to return volatility such as unsigned changes in firm value, and after controlling for a firm’s industry, size, and other attributes. These findings suggest that managers systematically underestimated their true exposure to pandemics, and that with respect to pandemics, firms’ risk factors had a significant blind spot. Thus, investors could not have systematically deduced which firms would be exposed to the COVID-19 pandemic based on firms’ risk factors alone.

Rethinking corporate exposure to pandemics 

Overall, the evidence presented provides one of the first systematic assessments of how the COVID-19 pandemic affected the financial markets. The fact that many managers did not include pandemics as a risk factor is somewhat surprising given that pandemics and disease outbreaks are not new phenomena: they occurred on smaller scales in the 2000s with the SARS, H1N1, Ebola, and Zika viruses, and on large scales several times in the 1900s and in earlier periods.

Carmen Reinhart recently argued that there is no “historical episode that can provide any insight as to the likely economic consequences of the unfolding global coronavirus crisis” (Reinhart, 2020). Additional research will be needed to determine the long-run economic impact of the pandemic (Horn et al. 2020).


Acemoglu, D, S Johnson and J Robinson (2003), “Disease and Development in Historical Perspective”, Journal of the European Economic Association 1: 397–405.

Almond, D and B Mazumder (2005), “The 1918 Influenza Pandemic and Subsequent Health Outcomes: An Analysis of SIPP Data”, American Economic Review 95: 258–262.

Baldwin, R and B Weder di Mauro (2020), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, CEPR Press.

Horn, S, C Reinhart and C Trebesch (2020), “Coping with disasters: Lessons from two centuries of international response”,, 20 March.

Reinhart, C M (2020), “This Time Truly Is Different”, Project Syndicate.

Schoenfeld, J (2020), “The Invisible Risk: Pandemics and the Financial Markets”, Covid Economics: Vetted and Real-Time Papers 6: 119–136.

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