How to Outlast a Pandemic: Corporate Payout Policy and Capital Structure Decisions During COVID-19

Abstract

The outbreak of the COVID-19 pandemic was a massive uncertainty shock to corporate cash flows. We examine its effect on firms’ strategies for preserving short-term capital by suspending dividends or share repurchase programs and raising new funds through bond and equity issues. We identify a short list of firm and stock characteristics that explains most of the cross-sectional variation in firms’ payout and fundraising decisions. We show that the expansive monetary policy stance pursued by the Federal Reserve in the early phase of the pandemic had a crucial impact on how firms timed and sequenced their actions. Movements in stock returns in the days surrounding corporate announcements were highly unusual during the pandemic, with suspensions of dividends or buybacks leading stock prices to recover, consistent with investors interpreting them as prudent actions that helped reduce firm risks.