IR papers: A pandemic’s literature review

Oct 07, 2020
A roundup of academic research from the world of IR studies

Our top scientists are feverishly working to uncover the financial and communications implications of the Covid-19 pandemic. Here’s a smattering of what we know so far.

Cultural traits affect how markets respond to disasters

Countries with higher avoidance uncertainty scores – such as Germany, Japan and Mexico – exhibited larger stock market decreases than lower avoidance-uncertainty countries by 5.4 percent over the three weeks after the first Covid-19 infection confirmation. Investors from the most individualistic countries – the US, the UK, South Africa – under-reacted. On average these countries suffered a 12.7 percent smaller stock market decline than countries with low individualism scores during the same period.

Meanwhile, a joint Saudi Arabia/ Pakistan study suggests that stringent Shari’ah Law screening criteria provide a ‘hedge’ against market downfalls, noting that the S&P Dow Jones Islamic Market indices outperformed their conventional counterparts in the first quarter of 2020.

America’s culture wars have spread to the capital markets

A US study reveals political identity not only shapes investor beliefs but also significantly influences trading volume. Using data from the investor social platform StockTwits, researchers find that partisan Republicans remained much more optimistic about equities than other investors during the pandemic’s first months. As the pandemic spread, Republicans became relatively more pessimistic about US-listed Chinese stocks. Investigators say the partisan disagreement explains 20 percent of the period’s huge abnormal trading volume.

‘The result is surprising given how unhelpful partisan identity is for equity valuation,’ comments study coauthor Anthony Cookson, associate professor of finance at the University of Colorado Boulder. ‘Information should drive financial markets. Instead, investors are looking to their politics to inform themselves about whether to be optimistic or pessimistic.’

Cookson believes investors default to core identities, such as political affiliation, when facing significant uncertainty, and attributes the divide in investor beliefs to the growing political polarization pervading society. ‘We have always considered [polarization] as being part of the policy realm,’ he says. ‘Now that it’s affecting how we invest our retirement assets, it feels like a qualitatively different thing.’

Corporate reporting practices were consistently shown to influence capital markets response

A German study of roughly 300 international companies’ 2019 annual reports finds those that reported on Covid-19 saw better abnormal returns than those that didn’t. The researchers speculate: ‘Investors value companies' transparency and their ability to promptly incorporate critical global developments into their reporting process.’

This hypothesis is supported by a major US study that documents that companies committed to their stakeholder relations – as proxied by positive public sentiment for their responses to the crisis – are perceived as more resilient, which in turn cushions negative returns.

A chief executive’s communication style and strategy also affect a company’s crisis resilience

One analysis finds the firms of CEOs who have a personal brand and who communicate regularly performed better than their industry peers during the pandemic’s initial months.

Quarterly earnings calls were saturated with Covid-19 references

With Covid-19 dominating the IR conversation worldwide, quarterly earnings conference calls have proven an especially fecund field for researchers, now often assisted by artificial intelligence.

Forty percent of conference calls discussed the outbreak in the year’s first quarter, and virtually 100 percent did thereafter. Quickest off the block, at the end of January, were airlines such as American Airlines Group and United Airlines Holdings.

By April, US companies' calls were mentioning coronavirus on average 14 times. For comparison, the word ‘competition’ averages about 2.3 times per earnings call.

‘Softening demand’ was the most commonly heard phrase in calls once social distancing rules were instituted. A Canadian study shows investors paid attention to Covid-19 discussions in calls’ presentation portions but, surprisingly, not to those during the Q&A session. The study also reports the first coronavirus reference significantly depressed everybody’s mood for the rest of the call.

ESG is here to stay

The role of ESG during a financial crisis has been the focus of much international research. Overall, evidence from the ongoing pandemic indicates the shock hasn’t shaken investors’ attention away from environmental issues. On the contrary.

A comprehensive 56-country study by the National Bureau of Economic Research was among those confirming the moderating influence of both stronger pre-2020 finances and CSR activities. A French study finds environmental strategies that address climate change as especially effective. Having a big long-term investor base further boosts the effect.


This article appeared in the Fall 2020 issue of IR Magazine. To continue reading, click here to open the full digital edition of IR Magazine  

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