Management Guidance Withdrawals During the Pandemic

The novel coronavirus (COVID-19) pandemic has drastically affected the global economy and offers a unique setting to investigate firm and market behavior through periods of heightened economic uncertainty. During the pandemic, many U.S. public firms withdrew their quarterly and annual guidance on their firms’ financial outlook. According to Intelligize, 851 companies announced the withdrawals of their management guidance between March 16 and May 31, 2020.[1] In contrast, guidance withdrawals were rare prior to the pandemic. The large increase in the number of withdrawals has attracted wide attention from investors, regulators, and the media (CNBC 2020; Wall Street Journal 2020). … Read more

Economic Downturns and the Informativeness of Management Earnings Forecasts

Economic downturns brought about by events such as the financial crisis and COVID-19 pandemic create substantial uncertainty for companies. While some firms endure the downturns unscathed or even thrive, others see their businesses decline drastically and their bankruptcy risk increase. The heightened uncertainty makes it especially difficult for market participants, such as investors and analysts, who rely on personal experience and public information to assess how a particular firm will perform during a downturn. In contrast, managers – as insiders – are better able to assess their firm’s future performance because they receive timely information about the firm’s operations and … Read more

COVID-19, Corporate Leverage, and Financial Fragility

The COVID-19 pandemic and efforts to combat its spread were an unprecedented shock to corporate cash flows and consequent need for external financing. How did corporate leverage respond? More important, what does the impact on leverage mean for financial stability? In the U.S., firms that were most affected by the pandemic, in terms of drop in demand, are likely facing a debt overhang problem and increased risk of default. We document these recent patterns on corporate leverage and financial fragility in our recent paper, which uses a dataset of about 3,000 U.S. public companies.

Controlling for the effects on … Read more

CSR and Firm Survival: Evidence from the Pandemic and the Climate Crisis

The global challenges of climate change and COVID-19 have created a grim economic outlook, with companies fighting for their very survival. As a result, companies are boosting their brands, and ability to compete, with Corporate Social Responsibility (CSR) programs. The airline industry, for example, responded to the pandemic and pressure to reduce CO2 emissions by playing a crucial role in transporting medical equipment necessary to tackle Covid-19. This step not only contributed to the well-being of society, but also improved the industry’s image and the ability of airlines to survive.

In a new paper titled “CSR and Firm Survival: Read more

Fragile Financial Regulation

As COVID-19 rocked financial markets in March 2020, the Treasury market failed to perform its role of maintaining financial stability. Unable to respond to the surge of investors liquidating their Treasury holdings to raise cash, the secondary market ground to a virtual halt. Liquidity disappeared. Trading costs skyrocketed. And the price of Treasuries – a common benchmark for financial assets – crashed with other assets, instead of remaining stable or rising.[1]

In a new article, we argue that this breakdown in the Treasury market undermined the credibility of Treasuries as the safe asset in financial regulation, and the collateral … Read more

Reforming the Macroprudential Regulatory Architecture in the United States

When the COVID-19 pandemic shuttered major economies in March 2020, it also wreaked havoc on financial markets. In the first few weeks of March, investment-grade corporate bonds lost roughly a fifth of their value, on par with the declines in equity and high-yield debt. (Haddad et al., 2020; Falato, Goldstein & Hortaçsu (forthcoming)). Contrary to the usual flight to quality, in mid-March, U.S. Treasury yields began rising and only stabilized after the Federal Reserve initiated a massive purchase program. (Vissing-Jorgensen, 2020). The distress in the Treasury market accentuated distress in other markets and liquidity challenges for firms. Nonbanks that service … Read more

Risk and Ambiguity in Turbulent Times

Over the past 50 years, the financial markets have been rocked by major shocks, which have led to the introduction of financial instruments that could cope with uncertainty in general and extreme events in particular. To manage the uncertainty surrounding the financial markets, there was a need for reliable uncertainty indicators. The traditional measure of uncertainty―stock volatility―has been challenged by advanced statistical methodologies (GARCH) and derivatives-based forward-looking forecasts (VIX).  In a new paper, we discuss the history of volatility and uncertainty measures, their informativeness, and the information derived from volatility derivatives.

Volatility measures (simple historical volatility, ARCH/GARCH, and the VIX) … Read more

ISS Offers a COVID-19 Update: Investor Related Class Actions

In March 2020, as the Coronavirus pandemic started to spread across the U.S. and wreak volatility in the stock market, securities class action complaints started to follow. Not surprisingly, U.S.-based litigation often follows wild stock market fluctuations as investors look to recover lost assets.

The very first COVID-19 related class action was filed on March 12, 2020 in USDC Florida (Southern) against Norwegian Cruise Line Holdings. Shareholders alleged the Miami-based company with deceptive sales tactics and misleading updates to the investor community related to its business and operations.

Since the Norwegian complaint was filed, in the last 14 months, ISS … Read more

Sullivan & Cromwell Discusses Delaware Chancery’s Rejection of MAE Claim for Covid Effects

On April 30, 2021, then Vice Chancellor (now Chancellor) Kathaleen McCormick of the Delaware Court of Chancery issued a post-trial decision in Snow Phipps Group, LLC v. KCAKE Acquisition, Inc.[1] ordering specific performance of a private equity purchaser’s obligation to purchase a business.  The Court rejected the buyer’s argument that COVID-19 was reasonably expected to cause a sales decline that would mature into a material adverse effect (“MAE”), noting that, although the company sustained a precipitous drop in sales at the outset of the COVID-19 pandemic, it rebounded in the two weeks prior to termination and was not projected … Read more

ISS Revisits the Performance of ESG Screened Indexes During the Pandemic

Nearly a year ago, we analyzed the outperformance of ESG strategies during the initial stage of the COVID-19 Pandemic. As of May 2020, we found that ESG indexes based on ISS ESG data had outperformed by 1.3% to 2.8%, with lower volatility than their benchmark over the first five months of 2020. In this article we revisit those findings to examine whether the ESG outperformance has held up as global stock markets have strongly recovered.

We focus here on the Solactive ISS ESG Screened Series, an index family which integrates ISS ESG’s most frequently requested ESG filters including:

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Read more

COVID-19 Isolation, Managerial Sentiment, and Corporate Policies

Global efforts to limit the spread of Covid-19 have prompted the widespread adoption of restrictions on people’s ability to go out and about and, as result, have thrust public mental health issues into the spotlight.  Mandatory work-from-home arrangements, for example, have created emotional distress for many homebound employees working alone. The U.S. Census Bureau’s December 2020 Household Pulse Survey found that 42 percent of respondents reported symptoms of anxiety or depression, an 11 percent increase over the previous year’s results. The American Psychological Association found that nearly eight in 10 adults claimed that the pandemic is a significant source of … Read more

The Darwinian Dynamics of Contracting

First-year law students typically learn that the terms of a contract represent a snapshot of the parties’ mutual intent, captured at the “magic moment” of contract formation. In reality, however, contractual sausage making is far messier than this idealized account admits. Even sophisticated negotiators can (and do) fall prey to inattention, bad planning, poor information, slothful mimicry, bad negotiating or decision-making skills, and more. And when they do, the contract terms they adopt may diverge from shared intent – sometimes substantially. In short, contracts are often the products of their environments, including political constraints, economic exigencies, and the inherent limitations … Read more

Sidley Austin Discusses Delaware Chancery’s Latest Guidance on Poison Pills

In a tale of what is old is new again, the Delaware Court of Chancery reviewed the propriety of a poison pill — a bulwark of the 1980s takeover era — but in the context of shareholder activism against the backdrop of the COVID-19 pandemic. Vice Chancellor Kathaleen McCormick’s detailed review of the pertinent case law and fact-specific decision to permanently enjoin The Williams Companies, Inc.’s extraordinary 5% poison pill offers a number of lessons for directors considering the adoption or renewal of a similar device. The Williams Cos. S’holder Litig. (Del. Ch. Feb. 26, 2021).

In March 2020, … Read more

A COVID-19 Quandary: Does a Force Majeure Clause Displace the Frustration Doctrine?

The frustration (or “frustration of purpose”) doctrine excuses a party from its contractual obligations when an extraordinary event completely undermines its principal purpose in making the deal. Historically, the doctrine has played a marginal role in contract law, as parties very rarely invoked it – and almost always without success. Courts are understandably reluctant to relieve parties from their contracts and will only do so in very unusual cases. Thus, frustration has long been an obscure doctrine, taught in law schools but infrequently litigated in court.

All that changed in 2020, as the COVID-19 pandemic – and government orders to … Read more

Covid and Cultural Due Diligence in M&A          

There’s reason to believe that M&A will rebound in 2021, according to Ernst & Young research.[1] Nevertheless, the multifarious challenges created by the Covid-19 pandemic have significantly altered the climate for acquisitions.[2] Even in normal times, getting a deal to close does not guarantee long-term success of any business combination. According to a 2019 study by Deloitte, business executives increasingly cite successful post-merger integration “as the single most important factor that leads to a successful transaction (23 percent this year, up from 21 percent last year).”[3] Despite that acknowledged need to focus early on firm integration, many … Read more

How the Covid-19 Pandemic Affected the Cryptocurrency Market

In our recent paper, we conducted an empirical analysis to test how the outbreak of the Covid-19 pandemic affected the market for cryptocurrencies (“cryptomarket”). One year into the pandemic, this market seems to have boomed. For instance, when the pandemic erupted, Bitcoin – the world’s first cryptocurrency – could be purchased for about $7,300. Today, the very same token costs more than $46,800 – a staggering 640 percent rise. Other leading cryptocurrencies (e.g. Ether), showed similar (or even greater) increases. However, this upward trend is not necessarily obvious from a theoretical standpoint, as there are several forces that might drive … Read more

The Information Mechanism in Corporate Citizenship: Evidence from COVID-19

When governments fail to respond quickly and effectively to a crisis, can companies help address the issue? In a recent article, we explore an important mechanism through which firms can do so as corporate citizens: information transmission within organizations. Specifically, we study whether U.S. firms’ business networks with China and Italy, including trade, executive, and branch-office networks, become information networks that can be used to mitigate the negative impacts of COVID-19.

COVID-19 and measures intended to contain its spread resulted in significant societal change and required governments to take unprecedented measures. Meanwhile, for companies, the pandemic made employee safety a … Read more

The Management Case for Inclusionary Corporate Purpose

The most vital and deeply practical argument for more broadly understanding corporate purpose comes from the management literature and the data on how to motivate people in organizations. Put simply, people in organizations do not work as hard or come up with as many innovations for companies unless they see themselves as part of a broader purpose beyond wealth maximization for shareholders. Employee engagement, first described in management literature, and now addressed even in mainstream business publications such as Forbes, is “the emotional commitment [an] employee has to the organization and its goals. When employees care … Read more

The Government Tools for Responding to Market Distress

In the spring of 2020, as the Covid-19 pandemic shut down economies around the world, pressure arose for governments to respond to the growing threat of pandemic-related market distress. In the United States, the initial proposals for government action varied in nature and focus. Some proposals targeted the financial system while a few targeted small businesses and individuals. Others were intended to bail out large businesses and specific industries. Still other proposals took a more institutional focus. In the context of bankruptcy law, many experts imagined building up the bankruptcy system as a primary bulwark against a seemingly imminent wave … Read more

Why Some Covid-19 Mitigation Strategies Fail

As the Covid-19 pandemic continues to disrupt the global economy, regulators are struggling to find cost-effective mitigation strategies. The goal of such strategies should be simple: Reduce the spread of the virus, while causing the least amount of damage to people’s everyday lives, including economic activity. Yet, the diverse measures taken by governments only seem to have limited success in achieving that goal. Given that current estimates of the economic damage are tens of trillions of dollars, figuring out why some Covid-19 mitigation strategies still fail should be a top priority. In a new paper, we attempt to do exactly … Read more