Sovereign Debt and Equity Returns in the Face of Disaster

48 Pages Posted: 10 Apr 2020 Last revised: 12 Nov 2021

See all articles by Thorsten Martin

Thorsten Martin

Bocconi University; IGIER - Innocenzo Gasparini Institute for Economic Research

Florian Nagler

Bocconi University; IGIER - Innocenzo Gasparini Institute for Economic Research

Date Written: September 15, 2020

Abstract

We study the role of sovereign debt for equity returns in the Covid-19 pandemic. Using individual stock-level data of more than 25,000 firms in more than 80 countries, we exploit variation in debt-to-GDP in narrowly defined industries and geographical regions. Following the outbreak of the pandemic, cumulative returns and cumulative CAPM-adjusted abnormal returns are lower in countries with higher debt-to-GDP ratios. Variation in debt-to-GDP explains around 23% of the average stock price decline in the initial phase of the pandemic. While corporate default risk rises, we find little evidence that debt-to-GDP captures uncertainty across countries. As the pandemic evolves, we further show that abnormal returns drop more in response to the same growth in infections among high- compared to low-debt-to-GDP countries. Our results are robust to a host of firm- and country-level controls, including sovereign credit ratings. Overall, sovereign debt is a key determinant of equity risk in the face of disaster.

Keywords: Sovereign debt, debt-to-GDP, disaster, COVID-19, firm-level equity returns, cross-country effects

JEL Classification: F30, G12, G14, G15, H12, H50, H63

Suggested Citation

Martin, Thorsten and Nagler, Florian, Sovereign Debt and Equity Returns in the Face of Disaster (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3572839 or http://dx.doi.org/10.2139/ssrn.3572839

Thorsten Martin

Bocconi University ( email )

Via Roentgen 1
Milan, 20136
Italy

HOME PAGE: http://https://sites.google.com/view/thorstenmartin

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Florian Nagler (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/site/floriannagler/

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Milan, MI 20136
Italy

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