Impact of operational fragility on stock returns:Lessons from COVID-19 crisis

Abstract

We examine how the market valuation of firms varies onaccount of their operational fragility that makes them vul-nerable to the COVID-19 pandemic. Using the data on plantlocation that uniquely identifies the vulnerability of firms tooperational disruptions, we find that firms with plantslocated in zones susceptible to higher infections earn signif-icantly lower returns. For firms with high operational fragil-ity, the marginal value of financial flexibility and operatingflexibility is higher. The adverse impact of the operationalfragility is lower for firms affiliated with the larger businessgroups. The paper identifies unique channels associatedwith the pandemic that impact firm value.