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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Stock Market Returns and Epidemic Disease Outbreaks |
| Organization Unit | |
| Authors |
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| Supervisors |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 41 |
| Date | 2020 |
| Abstract Text | COVID-19 pandemic is the worst epidemic disease outbreak since 1969. Not only does it claim numerous lives, but also disrupt the very foundation of the modern society. On March 2020, the rapid spread of coronavirus and the lockdowns around the world caused a wild turbulence on the financial markets. In particular, the US stock market, which is considered to be the most liquid and, hence, one of the most efficient ones, experienced one of the worst declines in its history. Indeed, numerous studies suggest the negative impact of various disasters on the stock market returns. For instance, Kaplanski and Levi (2010) discovered the negative relationship between aviation disasters and stock market returns. The reason for that is that aviation disasters can affect investor mood, or sentiment, which in turn impacts their financial decisions. At the same time, since the beginning of the COVID-19 pandemic, the amount of literature studying the impact of novel coronavirus on financial sector has been steadily growing. All of these new works further confirmed the negative impact of COVID-19, based on two main reasons: changes in expected future cash flows of the companies and negative investor sentiment. As it is clear, that the government efforts to contain the virus have a negative impact on businesses, we prefer to focus on the investor sentiment. Pharmaceutical industry was chosen as a focus of this work, as it is one of the obvious beneficiates during EDOs, as the demand for medical equipment, drugs, and, most importantly for the vaccines, increases drastically. Vaccines are particularly important, as they potentially can lead to huge cash flows for a company. However, the vaccine development is costly, and technologically advanced, as well as their use case is usually limited to only one disease (Hinman et al., 2006). Therefore, not all the companies can participate in the vaccine development race. At the same time, Humerman and Regev (2001) and Donadelli et al. (2016) discover that investor sentiment can spill over to other stocks as well, so other pharmaceutical companies, which are not engaged in developing a vaccine, can also benefit from overall investor sentiment. To study the influence of epidemic disease outbreaks on stock market returns, we study all EDOs that happened in recent past, namely SARS, H1N1, MERS, Ebola, and COVID-19. In this work, the stock market data on 91 pharmaceutical companies is used for the period from 02.02.2002 to 31.08.2020. Then 4 portfolios are constructed, namely value weighted (VW), equally weighted (EW), and 2 portfolios consisting of 10 smallest and 10 biggest companies based on market values. After that, two commonly used methods are employed to study the influence of diseaserelated news (DRNs) on the returns of 4 portfolios: an event study and a regression-based approach. Overall, our findings confirm the results of existing studies (Donadelli et al., 2016, Wang, Yang and Chen, 2012) that epidemic disease outbreaks positively influence the stock price returns of pharmaceutical companies. First, by applying the event study approach, we find that diseaserelated news (DRNs) lead to positive abnormal returns of small pharmaceutical companies. Using the regression-based approach, we confirm our findings. We discover that DRNs have a positive impact on stock prices, with the effect being stronger for the smaller companies. Although the potential reward is high, smaller pharmaceutical firms have a lesser chance to engage into the development of the vaccine, as the process is costly and technologically advanced (Hinman et al., 2007). Therefore we argue that the abnormal returns are caused by positive investor sentiment by overall optimism around vaccine development. In addition to the previous works in this field, our study provides further insights into the stock price behaviour of the pharmaceutical companies during EDOs. Our results indicate that the effect of DRNs is the strongest on the 2nd and 3rd days after the official announcements and that effect is persistent over 1 trading week after DRNs are being released. Moreover, we conclude that the abnormal returns are caused not by fundamental factors but rather driven by positive investor sentiment. Finally, we study the effect of fundamental factors, such as liquidity, leverage, R&D spending, profitability and relative valuation of the companies, on their stock market returns. The results indicate, that while normally the fundamental factors contribute to the stock price returns, their influence is not statistically significant on the event days. Hence, the returns are influenced by something else, namely by positive investor sentiment. The findings are of particular importance to the financial firms that are involved in asset management, as they give an opportunity to generate extra returns, as well as provide new ways of hedging during EDOs. The work also contributes to the behavioural theory, exploring the movement and reaction of stock market prices to new information releases. |
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