Stock market reactions under the shadow of the COVID-19 pandemic: Evidence from China

This paper studies how the Chinese stock market reacts to new COVID-19 infections under the zero-COVID policy. Consistent with the literature, we find that a COVID-19 outbreak within a city adversely affects the performance of local firms, but further unveils the effect’s nonlinearity. More importantly, we document an unexpected pattern of spatial spillover of the COVID-19 shock, which is likely to be caused by the policy itself. In addition, firms with significant retail exposure are most vulnerable, while firms with low pandemic exposure, larger size, state-owned enterprise (SOE) status, and robust finances demonstrate greater resilience to the COVID-19 shock. Mechanism analysis indicates that the COVID-19 effects are realized through both cash flow and discount rate channels. Supplementary back-of-the-envelope calculations illustrate the substantial economic consequences of these phenomena, which shed light on the debate on the optimal policy in response to a future pandemic.