Research finds rationally in investors’ response to the pandemic

Tuesday, November 2, 2021

Media Contact:
Bailey Stacy | Marketing and Communications, Coordinator | 405-744-2700 | [email protected]

The COVID-19 brought more than a dangerous virus: It upended our lives in ways large
and small. It also brought questions to the minds of some Spears School of Business
Department of Finance faculty and students:

• How is the stock market reacting to the pandemic, more specifically with respect to
  the airline, hotel and tourism industries?
• Are investors utilizing rationale to make their investment decisions or is it a panic
  and mass selloff type of event?

Dr. Betty Simkins, professor and head of Oklahoma State University’s Department of
Finance; Dr. David Carter, professor of finance; Mazumder Sharif, graduate student;
and Eric Sisneros, assistant professor of professional practice, offered their research
in a paper called The Market Reaction to COVID-19: The Case of Airline and Tourism Stock Returns.

When it became apparent the coronavirus was a pandemic that would reach further than
Asia, European and American markets responded, creating large declines in stock indices,
Sisneros said. This made sense because essentially everything was shutting down, and
a main driving force of stock prices is future revenues, which were abruptly halted.

The stock market began seeing declines from mid-February through the third week of
March 2020. Within this time frame, OSU researchers analyzed and measured market data
to determine if there was a rational response across various sectors.

“Are they selling everything or are they selling specific types of firms?” Sisneros
said. “When you look at it more granularly, you find that yes, indeed the market is
going down, but it’s not just a contagion effect where everyone is selling everything,
no matter what. They are selling rationally with respect to types and characteristics
of the firms.”

The best performing sectors were health care, consumer staples and technology, which
are non-discretionary sectors as opposed to more discretionary sectors, which showed
a decline. The health sector fared well due to the nature of the crisis, while consumer
staples saw an increase because of the necessity for essential items no matter the
state of the economy. Technology also did well due to the increase in telework and
the need to create alternative ways to interact.

Discretionary items, such as travel were delayed and thus more highly affected by
the COVID-19 pandemic. The worst performing sectors were financial services and energy.
Financial services hold the loans for airlines, hotels and other non-essential industries.
If they are predicted to do poorly and default on their loans, banks also suffer.
The energy sector underperformed because travel bans cut demand for energy and gas.

A correlation was seen between people-intensive and travel-linked sectors, which thrive
through tourism, and negative returns. Airlines, hotels and restaurants are all highly
linked to travel and impacted by people, which is why those sectors saw a decline.

“Airlines have a significant probability of failure,” Sisneros said. “They have historically
failed and then you add travel restrictions, and it creates a higher probability of
failure because they are burning a lot of cash every day even if they are not flying.

“Since March 20, we’ve had positive returns and overcome the old high pre-COVID-19
decline,” Sisneros said. “We’ve actually advanced beyond that in all of the indexes.”

So what is the significance of this data? It provides information on how the stock
market could react in the next crisis. There is an assumption that there is rationality
in the market, and this research shows evidence of that. Although the market will
sell off again, investors can determine the best place to invest by analyzing the
nature of the crisis and the industries it will affect.

“One of the main things the research tells us is if you are a sophisticated investor
and do your homework with respect to valuation, then you actually can find different
firms that offer potential going forward,” Sisneros said.

Story By: Bailey Stacy | [email protected] 

Photo Illustration By: Paul V. Fleming