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Market reaction to the COVID-19 Market

reaction to the
pandemic: evidence from coronavirus
disease 2019
emerging markets
Maretno Agus Harjoto
Pepperdine Graziadio Business School, Pepperdine University,
Malibu, California, USA, and Received 19 May 2020
Revised 14 October 2020
Fabrizio Rossi 7 December 2020
27 January 2021
Department of Electrical and Information Engineering, 18 March 2021
University of Cassino and Southern Lazio, Cassino, Italy Accepted 23 March 2021

Abstract
Purpose – This study examines the market reaction to the World Health Organization (WHO) announcement
of the novel coronavirus disease 2019 (COVID-19) as a global pandemic on the emerging equity markets and
compares the reaction with developed markets. This study also compares the market reactions to the COVID-19
pandemic with the market reactions to the 2008 global financial crisis.
Design/methodology/approach – Using the Morgan Stanley Capital International daily stock indices data
and the Carhart and the GARCH(1,1) models for an event study, the authors examine the cumulative abnormal
returns during 30 and 10 trading days and the extended 60 days before and after the WHO pandemic
announcement. It also compares the market reactions during the COVID-19 pandemic with the reactions to the
Lehman Brothers’ bankruptcy announcement during the 2008 global financial crisis.
Findings – This study finds that the COVID-19 pandemic had a significantly greater negative impact to the
stock markets in emerging countries than in the developed countries. The negative impact on the emerging
markets is more pronounced for firms with small market capitalizations and for growth stocks. The negative
impact of the COVID-19 pandemic is stronger in the energy and financial sectors in both emerging and
developed markets. The positive impact of the COVID-19 pandemic occurred in healthcare and
telecommunications for the emerging markets and information technology for the developed markets. This
study also finds that the equity markets in both emerging and developed countries recovered faster from the
COVID-19 pandemic relative to the 2008 global financial crisis.
Social implications – Investors’ desire to diversify their risks across different countries and sectors in the
emerging markets could bring superior returns. The diversification strategies bring critical financial supports
to forestall the contagion of COVID-19, to protect lives, and to save the emerging economies, especially for those
financially constrained countries that are facing twin health and economic shocks by channeling their
investments to countries with weak healthcare systems.
Originality/value – This study extends the literature that examines market reactions to stock market
shocks by examining the market reactions to the COVID-19 outbreak on the emerging and developed
equity markets across different market capitalizations, valuation and sectors. This study also finds that
the markets recovered quicker from the COVID-19 pandemic announcement than during the 2008 global
financial crisis.
Keywords COVID-19, Event study, Emerging markets, Small cap, Growth stocks, Sectors
Paper type Research paper

JEL Classification — G01, G14, G15

The authors would like to thank the Editor-in-Chief Ilan Alon and three anonymous reviewers for
their valuable constructive comments and recommendations. Harjoto acknowledges the financial
support and release time from the 2019–2021 Denney Academic Chair Endowment at Pepperdine
Graziadio Business School for financial support and release time for this research project and the
support from Vance Ito, John Paglia and Clemens Kownatzki. The authors acknowledge Victor Tsao and
the Tsao Family Foundation for their financial support for the Bloomberg terminal at the Pepperdine
International Journal of Emerging
Graziadio Business School that allows us to conduct this research. Tsao Family Foundation financial Markets
support for the Bloomberg terminal at the Pepperdine Graziadio Business School has generated © Emerald Publishing Limited
1746-8809
groundbreaking research on COVID-19. The authors declare that they have no conflict of interest. DOI 10.1108/IJOEM-05-2020-0545
IJOEM Introduction
The global economic and financial markets have been shaken with the outbreak of the novel
coronavirus disease 2019 (COVID-19). Initially identified in Wuhan city at Hubei province in
China in December 2019, COVID-19 rapidly spread across 213 different countries (Centers for
Disease Control, 2020). Alon et al. (2020) present the timeline of major event dates during early
COVID-19 crisis. The World Health Organization (WHO) indicates that the COVID-19 virus
spreads through droplets of saliva or discharge from the nose when an infected person
coughs or sneezes [1]. One year after the COVID-19 spread throughout the world, the recent
WHO weekly epidemiological update has identified over 93 m cases and over 2 m deaths from
COVID-19 (WHO, 2021). According to the Centers for disease Control (CDC, 2020), corona
viruses are commonly found in people and many different species of animals (e.g. bats).
COVID-19 infects the lining of the respiratory system (lungs), which may cause an acute
respiratory distress syndrome, severe breathing difficulties, complications and death,
especially in those with pre-existing medical conditions.
In an effort to curb the unprecedented speed of the COVID-19 infection rate, many
countries instituted travel restrictions, lockdowns, shelter-in-place orders and social
distancing, which created sudden and massive global disruptions in production, supply
chains and the input-output of goods and services (Alon, 2020; Alon et al., 2020; Rana et al.,
2020). Bretas and Alon (2020) demonstrate the devastating impact of COVID-19 on franchise
sector in Brazil. These global disruptions brought negative global economic shockwaves that
adversely affected the financial markets, both in developed and emerging economies.
McKibbin and Fernando (2020) estimated that the large-scale disruptions from the COVID-19
pandemic are more severe in developing countries where the population density is higher and
the healthcare systems are less developed. Thus, our study focuses on the impact of the
COVID-19 pandemic on the equity of markets in emerging economies.
While recent literature examines the impact of the COVID-19 pandemic on the stock
markets in the United States (US) and China, and the impact on global gross domestic product
(GDP) (Baker et al., 2020; Ma et al., 2020; Ramelli and Wagner, 2020; Wang et al., 2020), none of
these studies examine the impact of the COVID-19 pandemic on the equity markets in the
emerging markets compared to the developed markets.
The pandemic announcement from the WHO on March 11, 2020, caused terrible crashes in
the global stock markets. For instance, the Financial Times Stock Exchange (FTSE) 100
Index dropped more than 10% on its worst day and the Dow and Standard and Poor’s (S&P)
500 indices experienced the steepest daily declines since the 1987 crash [2]. Consistent with
recent literature (Ramelli and Wagner, 2020; Harjoto et al., 2020a), we conducted an event
study to examine the stock market reactions to COVID-19 surrounding March 11, 2020. Based
on institutional theory (North, 1990, 1991, 2005; Khanna and Palepu, 1997, 2011), we
hypothesize that the emerging markets’ formal and informal constraints are relatively
weaker compared to the developed countries. North (2005) indicates that these formal and
informal constraints influence countries’ ability to adapt from the adverse impact of a global
shock. Bretas and Alon (2020) indicate that the capacity of healthcare system in emerging
economies is severely limited to deal with such rapid outbreak of COVID-19. Therefore, the
impact of this unprecedented global financial shockwave from the COVID-19 pandemic on
the emerging equity markets are expected to be greater than the equity markets in the
developed countries. Based on the pecking order of capital structure theory and the financial
constraints’ literature (Myers and Majluf, 1984; Farre-Mensa and Ljungqvist, 2016; Fazzari
et al., 1988; Kaplan and Zingales, 1997), we also hypothesize that the adverse impact of the
COVID-19 pandemic is larger for firms with smaller market capitalizations relative to those
with larger market capitalizations, especially in the emerging countries.
The literature also documents that the impact of financial crises on equity markets also
depends on the equity valuation, i.e. growth vs value stocks (Baker and Wurgler, 2007;
DeLong and Magin, 2006; Schwartz and Moon, 2001). We argue that the COVID-19 pandemic Market
brought an unprecedented effect on value and growth stocks since it increased the demand reaction to the
for products and services from companies with high growth opportunities (growth stocks)
relative to the value stocks. Therefore, we hypothesize that the impact of the COVID-19
coronavirus
pandemic on growth stocks is different from the impact on the value stocks. Finally, extant disease 2019
literature demonstrates that the impact of a financial crisis varies across different industry
sectors (Carter and Simkins, 2004; Fernando et al., 2012; Johnson and Mamun, 2012; Wang
and Corbett, 2008). Therefore, we examine the impact of the COVID-19 pandemic across 11
different sectors. We argue that the impact of the COVID-19 pandemic varies across different
sectors where some sectors (i.e. energy and financial sectors) are adversely affected while
others (i.e. information technology, healthcare and telecommunications) are positively
affected by the COVID-19 outbreak.
Using the Morgan Stanley Capital International (MSCI) stock market indices to represent
the stock markets in emerging and developed countries, small vs large market capitalizations
and value vs growth stock in 11 sectors, our study finds evidence to support our hypotheses.
Furthermore, we compare the market reactions to the COVID-19 pandemic with the market
reactions to the 2008 global financial crisis. Consistent with Fernando et al. (2012) and
Johnson and Mamun (2012), we use the Lehman Brothers’ bankruptcy announcement
(September 15, 2008) as the event date to represent the 2008 global financial crisis. We find
that the adverse market reactions to the COVID-19 pandemic quickly recovered during the 60
trading days after the WHO announcement on March 11, 2020. Consistent with existing
literature (e.g. Baker, 2016; Johnson and Mamun, 2012; Llaudes et al., 2010), we find that the
adverse market reactions to the 2008 global financial crisis became even more severe during
the 30 and 60 days after the Lehman Brothers’ bankruptcy announcement. This finding
confirms the claims that the COVID-19 pandemic has brought a V-shape market reaction on
the global equity markets (Cox et al., 2020; Pound, 2020).
Our study brings several contributions to the existing literature. First, we present the
impact of the COVID-19 pandemic announcement from the WHO on the emerging markets’
equity indices and compare this with the developed market equity indices. We add to the
recent literature that examines the market reactions to the COVID-19 pandemic using
the event study method (Ramelli and Wagner, 2020; Harjoto et al., 2020a) by focusing on the
emerging equity markets. Our study extends the literature that examines the market
reactions to the stock market crashes (e.g. Drakos, 2010; Fernando et al., 2012; Hon et al., 2004)
by examining the market reactions to the COVID-19 outbreak. Our study also contributes to
the literature that examines the impact of stock market crashes across different sectors
(Carter and Simkins, 2004; Johnson and Mamun, 2012; Wang and Corbett, 2008) by examining
the impact of the COVID-19 pandemic across 11 different sectors in emerging and developed
markets. Finally, our study provides empirical evidence that demonstrates the impact of the
COVID-19 pandemic on the stock markets is following a sharp V-shape, where stock markets
seem to recover quickly during 60 trading days after the WHO announcement of COVID-19 as
a global pandemic.

Literature review
Literature that examines the impact of a global pandemic on the stock markets is growing
rapidly during the COVID-19 outbreak. Barro et al. (2020) indicate that the 1918 Spanish flu
had a significant negative impact on stock returns. However, Velde (2020) finds that the
magnitude of the negative impact of Spanish flu on the stock markets was relatively modest.
Baker et al. (2020) compares the US stock market volatility from the COVID-19 pandemic with
the avian flu (H5N1), severe acute respiratory syndrome (SARS), swine flu (H1N1), Ebola and
Middle East respiratory syndrome (MERS). They find that the COVID-19 pandemic
IJOEM generated an unprecedented increase in stock market volatility beyond all other pandemic
diseases that have occurred since the early 1900s. Baker et al. (2020) indicate that the ease of
COVID-19 infection and the death tolls, rapid information flow, and interconnectedness
across countries make the impact of the COVID-19 pandemic on the stock markets unique.
Until recently, studies that investigated the impact of global pandemics on emerging
markets were relatively limited. Wang et al. (2020) estimate the impact of the COVID-19
pandemic on China’s GDP based on the daily volume of train passengers during the 2020
Spring Festival (Chinese New Year) and find that China’s economy declined by
approximately 4.8 tn yuan in the first quarter of 2020 and the 2020 annual GDP growth is
expected to decline by approximately 4.78%. Sergi et al. (2020) find that the impact of
COVID-19 in emerging and developed countries is compounded with the deteriorating of
countries’ macroeconomics factors. Harjoto et al. (2020b) find that the impact of COVID-19 on
global equity markets during rising infection period is different from the stabilizing infection
period. Corbet et al. (2020) examine the impact of the COVID-19 pandemic on the Shenzhen
and Shanghai Stock Exchanges and find that it had a strong impact on the volatility of the
Chinese stock markets.
Consistent with extant literature that examines the impact of recent global financial crises
on the stock markets (Baker, 2016; Becchetti and Ciciretti, 2011; Fernando et al., 2012; Johnson
and Mamun, 2012), we use the event study method and extend this literature by examining
the impact of the COVID-19 pandemic on the emerging markets’ equity indices by examining
the market reactions, measured by the cumulative abnormal returns (CARs) of emerging
markets’ equity indices. We compare the CARs for emerging market equity indices with the
CARs for developed markets’ equity indices.
Literature that utilizes the event study method on the broad stock market index reactions
to negative events has mostly focused on financial crises (e.g. Kabir and Hassan, 2005; Millon-
Cornett and Tehranian, 1989) and a terrorism event (e.g. Carter and Simkins, 2004; Drakos,
2010). Fernando et al. (2012) examine the market reactions from the Lehman Brothers’
bankruptcy announced on September 15, 2008 [3]. They find that the S&P 500 index was
adversely affected by the announcement. Furthermore, the impact of the Lehman Brothers’
bankruptcy was approximately
5% or $23 bn risk-adjusted aggregate losses for the stocks
of Lehman Brothers’ clients and clients of other investment banking in similar industry
during the seven days surrounding the announcement date. Similarly, Johnson and Mamun
(2012) also find that there was a negative abnormal return (AR) for stocks of financial
institutions from the Lehman Brothers’ bankruptcy announcement on September 15, 2008.
Carter and Simkins (2004) and Drakos (2010) examine the market reactions to the September
11, 2001, terrorist attack. Overall, the literature indicates that the event study method
provides a good measure of the broad stock market reactions from a specific global event
(Carter and Simkins, 2004; Fernando et al., 2012).

Institutional differences between emerging and developed countries

The institutional economics theory explains differences in the institutional and capital
markets’ structures between the emerging economies and the developed countries. North
(1990, 1991, 2005) indicates that the strengths of formal and informal constraints influence the
magnitudes of the impact from a catastrophic disaster on the economic and financial systems.
Bretas and Alon (2020) indicate that emerging countries have some common institutional
characteristics such as weaker legal setting, lower economic development and higher
financial and social risk that limit the range of possible responses to the COVID-19 outbreak.
Khanna and Palepu (1997) characterize the emerging markets as having weak
institutional contexts in product, capital, labor markets, regulatory system and lack of
mechanisms for enforcing contracts. They characterize these weak institutional contexts as
institutional voids (Khanna and Palepu, 2011). According to the World Value Survey and the
Edelman survey, public opinions on the emerging markets indicate low trust in the state to Market
uphold property rights or to enforce contracts (Aghion et al., 2010; Lins et al., 2017). Therefore, reaction to the
the economic exchange is very dependent upon information from more credible institutions
outside of the countries.
coronavirus
Several studies also indicate that the emerging markets generally have lower capacity and disease 2019
less advanced fiscal and monetary policies infrastructure. Furthermore, the capital markets
in emerging countries generally have lower liquidity and greater information asymmetry
than the developed markets (Bhagat et al., 2011; ElBannan, 2017; Khanna et al., 2005).
Therefore, any unexpected global economic shockwave to the emerging markets
significantly increases the uncertainties and adversely affects their financial markets
(Tran et al., 2018).

The impact of capital constraints for small vs large market capitalizations

Myers and Majluf (1984) indicate a firm’s pecking order of obtaining capital starts with
internally generated financial slacks before obtaining capital from external sources.
However, they also indicate that small firms generally have fewer financial slacks and face
greater information asymmetry between managers and potential outside investors.
Therefore, small firms tend to have greater financial constraints than large firms (Farre-
Mensa and Ljungqvist, 2016; Fazzari et al., 1988; Kaplan and Zingales, 1997).
The literature also indicates that financial meltdowns and shrinkage in capital markets’
liquidity have asymmetric impacts for small firms relative to large firms. Campello et al.
(2010) conducted a survey across 39 countries during the 2008 financial crisis and found that
small firms tend to face greater financial constraints. Due to these capital constraints, small
firms tend to have greater reductions in their capital spending, marketing and employment,
tend to pass attractive projects opportunity and tend to sell off productive assets to generate
funds during this financial crisis. They conclude that the financial crisis had a significantly
greater adverse valuation impact on small firms.

The impact of a financial crisis across various firm valuations

A financial crisis also has a significant impact on a company’s valuation. During the dot.com
bubble, firms’ greater growth opportunity (growth stocks) that had lower (no) earnings,
tended to fall more drastically than firms’ steady income (value stocks). These growth firms
experienced a greater decline in their securities prices because their stocks were harder to
value (Baker and Wurgler, 2007; DeLong and Magin, 2006; Schwartz and Moon, 2001). Value
stocks usually have more stable earnings. Therefore, the equity valuations of value stocks are
less affected by financial turmoil.

The impact of financial crises across industries

Existing studies also document that the effects of financial crises vary across different
industries and sectors. Carter and Simkins (2004) show that the impact of the September 11
terrorist attacks adversely affected the airlines stocks. Wang and Corbett (2008) indicate that
property and liability insurers’ stocks experienced greater negative abnormal returns (ARs)
compared to the life and health insurers after the terrorist attacks on September 11. Fernando
et al. (2012) and Johnson and Mamun (2012) also demonstrate that the Lehman Brothers’
bankruptcy filing brought significant negative ARs to stocks in the financial industry.
Recent studies that examine the impact of COVID-19 across various sectors in emerging
markets focus on China. He et al. (2020) find the pandemic adversely impacted Chinese firms
that operate in transportation, mining, electricity and heating and environmental industries,
while those that operate in manufacturing, information technology, education and healthcare
IJOEM industries have been more resilient against COVID-19 effects. Fu and Shen (2020) find a
negative effect of COVID-19 on China energy companies’ performance and indicate that the
impact of COVID-19 varies across different sectors. Gu et al. (2020) find a varying impact of
COVID-19 across different sectors based on electricity use in China. Our study extends this
literature by examining broad equity market indices in emerging and developed countries
across 11 different sectors.

Hypotheses
While COVID-19 indeed started in China as early as December 2019, the information
regarding this infectious disease was mostly suppressed. Alon et al. (2020) carefully
investigate the timeline of early COVID-19 cases and examine the differences in government
responses between two political systems, democratic and authoritarian. They argue that lack
of free flow of information, lack of median competition, transparency and untrustworthy
public information, especially in authoritarian political system makes public to rely on
private messages and rumors instead of facts.
Based on Alon et al. (2020), we argue that due to lack of free flow of information, lack of
median competition, transparency and untrustworthy public information, people in emerging
countries tend to rely on news and information outside of their own countries that they deem
to be more reliable than the domestic news. The WHO announcement on March 11, 2020, was
become very apparent and considered to be the most credible information by both emerging
and developed countries that of COVID-19 has become a global pandemic. Consistent with the
recent literature, we consider the COVID-19 pandemic as one of the largest shocks to the
emerging markets (Baker et al., 2020; Ramelli and Wagner, 2020; Wang et al., 2020). Thus, we
expect significant market reactions to the WHO announcement of the COVID-19 pandemic.
Based on institutional economics theory (North, 1990, 1991, 2005) and the existing studies
discussed above (Alon et al., 2020; Bhagat et al., 2011; Bretas and Alon, 2020; ElBannan, 2017;
Khanna and Palepu, 1997, 2011; Khanna et al., 2005), we argue that emerging markets tend to
have weaker formal and informal constraints, greater institutional voids, lower capacity of
fiscal and monetary policies, lower liquidity, weaker healthcare system, greater informal jobs
that cannot be done remotely (Bretas and Alon, 2020) and greater information asymmetry to
withstand the adverse impacts of COVID-19 pandemic shock. Therefore, we expect that the
adverse impact of the COVID-19 pandemic on the equity markets, measured by the WHO
announcement on March 11, is greater in emerging markets compared to the developed
markets. Thus, our first hypothesis is stated as the following:
H1. The market reaction to the COVID-19 pandemic is more negative in the emerging
markets compared to the developed markets.
Based on the pecking order of capital structure and the asymmetric impacts of changes in
capital market liquidity across small vs large firms, we argue that small firms, measured by
small market capitalizations, tend to face greater financial constraints from the COVID-19
pandemic than large firms with large market capitalizations. More importantly, firms with
small market capitalizations in the emerging markets face double-constraints from both the
institutional voids and lack of liquidity in their capital markets, lower availability of financial
slacks, greater information asymmetry and the fact that small firms have competitive
disadvantages in obtaining capital relative to large firms. Yildiz et al. (2020) indicate that the
cost of capital for companies in emerging markets is significantly larger than in the developed
markets. Khawaja and Mian (2008) indicate that small firms in emerging markets tend to
experience a greater decline in their ability to borrow while large firms via their political
connections are able to compensate for a decrease in their borrowing capacities. Therefore, we
expect that the adverse impact of the COVID-19 pandemic is greater for small firms with
small market capitalizations (small cap stocks) in emerging markets than those in developed Market
markets. Thus, our second hypothesis is stated as the following: reaction to the
H2. The market reaction to the COVID-19 pandemic is greater for small cap stocks in the coronavirus
emerging markets than small cap stocks in the developed markets. disease 2019
Existing literature examines the impact across value and growth firms after the dot.com
bubble burst. We argue that the COVID-19 pandemic may have a different impact on
companies’ valuation relative to the dot.com bubble. During the COVID-19 pandemic, there is
an unprecedented increase in the demand for products and services for these growth
companies that develop products and services in information technology, distance
communications, COVID-19 treatment and prevention, and biotechnology and
pharmaceutical products (Franck et al., 2020). Therefore, the impact of the COVID-19
pandemic on value and growth stocks becomes an empirical question.
Furthermore, based on the institutional voids framework, lack of liquidity in capital
markets, and greater information asymmetry in the emerging markets, we expect that the
positive market reactions from increased demands for products and services by these growth
stocks in emerging markets could be offset by the lack of liquidity and greater information
asymmetry. Therefore, we state our third non-directional hypothesis as the following:
H3. The market reaction to the COVID-19 pandemic on value and growth stocks in the
emerging markets is different from the market reaction in the developed markets.
Shelter-in-place orders and travel restrictions to prevent the spread of COVID-19 have
generated shocks in the supply and demand for products and services across various sectors.
Plummeting crude oil prices along with significant shrinkage in the demand for travel,
cruises, leisure and hospitality services have created significant challenges in these sectors.
However, there has been a significant surge in the demand for teleconferencing, online
commerce and healthcare. Bretas and Alon (2020) demonstrate that the franchising sector in
Brazil is resilient to COVID-19 disruptions due to close collaborations between franchisors
and franchisees. Hence, we expect that the market reactions to the COVID-19 pandemic vary
across different sectors. Although the COVID-19 pandemic has adversely affected certain
sectors (e.g. oil, gas and airlines) in both emerging and developed markets, we expect that
there are differences in what are considered “essential needs” in emerging markets compared
to the developed countries. We also expect that the impacts of the COVID-19 pandemic vary
across different sectors in emerging markets relative to the developed markets. Accordingly,
our fourth hypothesis is stated as the following:
H4. The market reaction to the COVID-19 pandemic varies across different sectors in the
emerging markets compared to the developed markets.
Appendix 1 provides a systematic summary of the existing literature that is relevant to our
study based on the objectives and main findings, methodologies, focus on emerging and/or
developed countries and implications. Using the MSCI equity indices and an event study
method, our study extends the literature by examining the impact of COVID-19 on the
emerging markets and compares it with the developed markets. Our study examines the
differing impacts on stock indices for small and large market capitalizations, value and
growth, and across 11 different sectors. This study also compares the market reactions to the
COVID-19 pandemic with the market reactions to the 2008 global financial crisis (GFC).

Data and methodology

We collected daily MSCI stock indices as our data source from the Bloomberg terminal. These
robust data are 99.6% accurate in index production; $13.1 tn assets under management are
IJOEM benchmarked to MSCI indices, over 225,000 equity indices are calculated daily, and over 1,300
equity exchange traded funds (ETFs) are based on MSCI indices [4]. We use MSCI stock
indices for emerging markets (MXEF), emerging markets excluding China (MXCXBRV),
developed countries (MXWO), emerging market large market capitalizations (MXEFLC),
emerging market small market capitalizations (MXEFSC), emerging market value stock
index (MXEF000V), and emerging market growth stock index (MXEF000G). We use the
developed market large market capitalizations (MXWOLC), developed market small market
capitalizations (MXWOSC), developed market value stock index (MXWO000V) and
developed market growth stock index (MXWO000G). We use the MSCI All Country World
Index (ACWI) equity index (MXWD) as the market benchmark for developed and emerging
markets [5].
We also use 11 sectors based on the MSCI sector classification (energy, materials,
industrials, consumer discretionary, consumer staples, healthcare, financials, information
technology or IT, communication services, utilities and real estate) for both emerging markets
and developed markets. This 11 sectors’ classification is consistent with the Industry
Classification Benchmark (ICB) and the Global Industry Classifications Standard (GICS). It
was jointly developed by S&P and MSCI; this classification is considered more accurate in
capturing stock returns across various industries and is the most popular industry
classification among practitioners (Bhojraj et al., 2003).
As indicated above, we specifically examined the WHO announcement of COVID-19 as a
global pandemic on March 11, 2020, as our event date. We examine CAR (
30,þ30) during
the 30 days prior and the 30 days after the event date and CAR (
10,þ10) during the 10 days
prior and the 10 days after the event date. We also examine the extended CARs up to 60 days
prior and 60 days after the event date (CAR (
60,þ60)). Thus, our event window spans from
December 19, 2019, through June 3, 2020. We use the Eventus program that utilizes 255
trading days prior to December 19, 2019, which spans from December 27, 2018, to December
18, 2019, as our estimation period (Cowan, 2007). Therefore, the overall returns data that are
used in our study span from December 27, 2018, through June 3, 2020.
Consistent with Fernando et al. (2012), we use the Fama-French-Carhart four-factor or
Carhart model (Carhart, 1997) that is commonly used to estimate ARs in event study
literature. The Carhart model is specified as follows:
Rit
Rft ¼ αi þ βi ðRmt
Rft Þ þ γ i SMBt þ δi HMLt þ λi MOMt þ εit (1)

where Rit − Rft and Rmt − Rft represent the excess return of the stock index and the market
over the risk-free asset return, respectively. αi denotes Jensen (1968) alpha, which can be
interpreted as the systematic ARs above or below the return achieved by the equity
benchmark for the same level of systematic risk. The size factor, SMBt (small minus big),
represents the difference in return of small stocks’ portfolios and big stocks’ portfolios. The
book-to-market ratio factor, HMLt (high minus low), represents the difference in return of
investing high book-to-market ratios’ portfolios and low book-to-market ratios’ portfolios.
The momentum factor, MOMt, represents the difference in return of the winner stocks’
portfolios and loser stocks’ portfolios. εit represents the error term. All factors are value-
weighted. βi is the portfolio’s systematic exposure to the market portfolio. γ i, δi and λi
measure the exposure of a portfolio to the small cap, value, and momentum investment styles.
We downloaded the daily four-factor data (Rmt
Rft, SMBt, HMLt and MOMt) from
Kenneth French’s website. Since we analyze both emerging and developed markets, we
specifically adopt the emerging and developed markets’ four-factor data from Kenneth
French’s international research returns [6]. We keep the consistency between factor loadings
and our stock indices’ returns by using the emerging markets’ four-factor loading when we
estimate the ARs for the emerging markets’ MSCI indices and the developed markets’ four-
factor loading when we estimate the ARs for the developed markets’ MSCI indices for the Market
Carhart model. The parameters and ARs are estimated using the Eventus software developed reaction to the
by Cowan Research LC (Cowan, 2007) [7]. Eventus is widely used to estimate the ARs from
various recent event study literature (i.e. Patel et al., 2020; Racine et al., 2020).
coronavirus
Studies indicate that time-series financial and volatility data may exhibit a serial disease 2019
correlation and suggest correction of this serial correlation of the error term using the
generalized autoregressive conditional heteroscedasticity or GARCH(1,1). Bollerslev (1986),
Bollerslev et al. (1992), Erdington and Guan (2004) and Nelson (1990) indicate that
GARCH(1,1) is the most common model to account for the time-varying volatility in financial
data. Thus, following this literature, we also estimate the ARs based on the GARCH(1,1) of the
error term (εi:t) from the following market model:
Ri;t ¼ αi þ βi x Rmi;t þ εi:t (2)

where the error term (εi:t ) conditional to information available in the previous day t-1 follows a
normal distribution with a zero mean and a conditional variance hi,t. The conditional variance
(hi,t) is defined as the following equation:
hi;t ¼ ωi þ δi xhi;t−1 þ γ i ε2i;t−1 (3)

where ωi > 0, γ i > 0, δi ≥ 0 and γ i þ δi < 1. The parameters are estimated by maximum
likelihood using the Eventus software developed by Cowan Research LC (Cowan, 2007).
Consistent with Fernando et al. (2012), we estimate the CARs for 30 days prior and 30 days
after the event date for (
30,0), (
10,0), (0,þ10), (0,þ30), (
10,þ10), (
30,þ30). Consistent
with existing literature that finds the persistent impact of the 2007–2008 GFC beyond the
30 days’ event window (Baker, 2016; Johnson and Mamun, 2012; Llaudes et al., 2010), we also
examine the extended 60 days’ event window (
60,0), (0,þ60) and (
60,þ60). We calculate
the t-ratios for these CARs using the Eventus software and then conduct the Bonferroni
correction on the p-value to reduce the type I error (Bonferroni, 1936) based on Harvey et al.
(2020) as indicated in Appendix 2.

60
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45 Figure 1.
-50 Abnormal returns in
-55
-60
emerging and
-1.00% -0.80% -0.60% -0.40% -0.20% 0.00% 0.20% 0.40% 0.60% 0.80%
developed markets
(Carhart model)
DEV EMER
IJOEM Empirical findings
Figure 1 presents a comparison of the daily ARs for emerging markets (MXEF) and
developed markets (MXWO) from 60 days prior and 60 days after the WHO announcement.
We find that the daily ARs for emerging markets are significantly more volatile than the daily
ARs for developed markets. More importantly, the daily ARs for emerging markets tend to be
more negative than the ARs for the developed markets, especially right after the WHO
announcement.
We also examine the CARs to measure the difference of ARs for the emerging markets
from the developed markets in Table 1. Panel A presents the results from the Carhart model
while Panel B presents the results from the GARCH(1,1) model. We find that the emerging
markets react more negatively compared to the developed markets. The t-test differences in
CARs for 10 and 30 days’ event windows for both the Carhart and the GARCH(1,1) models
demonstrate that the CARs for emerging markets are 1.74–4.37% significantly lower than the
CARs for developed markets. We conduct a robustness check by using the MSCI emerging
markets’ index excluding China (EMER Ex-China) and find that the t-test differences in CARs
for 10 days’ and 30 days’ event windows confirm our finding that the CARs for emerging
market equity are significantly negative compared to the CARs for developed markets in both
Carhart and GARCH(1,1) models. The magnitudes of differences in CARs between emerging
markets excluding China and developed markets are
2.43 to
10.06%, which is
economically significant. Therefore, we find strong evidence to support our first
hypothesis (H1) that the market reaction to the COVID-19 pandemic is greater and more
negative in the emerging markets compared to the developed markets. Our finding is also
consistent with existing studies that demonstrate the impact of the COVID-19 pandemic on
the emerging countries’ GDP is larger than on the developed countries (Ma et al., 2020;
McKibbin and Fernando, 2020; Wang et al., 2020).

EMER t-test EMER
t-test EMER Ex-

EMER Ex-CHINA DEV DEV CHINA – DEV

Panel A. Carhart model

CAR (
60,0)
3.05%*
3.88%*
2.44%*
0.60%
1.44%
CAR (
30,0)
4.86%**
6.44%**
3.10%**
1.76%**
3.34%**
CAR (
10,0)
4.97%***
6.61%***
3.94%***
1.03%***
2.67%***
CAR (0,þ10)
5.12%***
6.87%**
4.37**
0.75%**
2.51%**
CAR (0,þ30)
3.17%**
2.05*
2.33%*
0.84%* 0.28%
CAR (0,þ60)
2.54%
1.40% 4.37%
6.07%
5.77%
CAR (
10,þ10)
10.24%***
10.93%***
7.09%***
3.15%***
3.84%***
CAR (
30,þ30)
7.51%**
5.57%*
3.14%**
4.37%**
2.43%**
CAR (
60,þ60)
5.38%
2.21% 1.26%
6.64%
3.47%
Panel B. GARCH(1,1) model
CAR (
60,0)
11.32%**
15.05%**
8.93**
2.39%**
6.12%**
CAR (
30,0)
16.59%**
21.78%**
13.42%**
3.17**
8.36%**
CAR (
10,0)
18.42%***
24.06%***
16.20%***
2.22***
7.86%***
CAR (0,þ10)
13.75%***
17.57%***
10.83%***
2.92***
6.74%***
CAR (0,þ30)
8.68%**
11.86%**
6.55%*
2.13*
5.32%**
CAR (0,þ60) 0.36% 0.63% 10.83%
10.47%
10.21%
CAR (
10,þ10)
23.34%***
31.52%***
21.46%***
1.88%***
10.06%***
CAR (
30,þ30)
13.15%**
20.51%**
11.41**
1.74**
9.10**
Table 1. CAR (
60,þ60)
6.14%
11.32%
1.48%
4.66%
9.84%
Emerging markets vs Note(s): *, ** and *** represent statistically significant at 10%, 5% and 1% level, respectively. The statistical
developed markets significance is adjusted based on the Bonferroni correction (Harvey et al., 2020)
 We find that the difference in the extended CARs for the 60 days’ event window between Market
emerging and developed countries is statistically insignificant. More importantly, we observe reaction to the
that the CARs during 60 days after the WHO announcement on March 11, 2020, in both
Carhart and GARCH(1,1) models for both emerging and developed markets, were less
coronavirus
negative and statistically insignificant. This implies that the stock markets in both emerging disease 2019
and developed countries rebounded from the declining trend during the 60 days after the
WHO announcement.
Next, we examined the ARs for firms with large market capitalizations (large cap) and
firms with small market capitalizations (small cap) in both emerging and developed markets’
indices. Figure 2 displays the daily ARs for large cap between emerging (MXEFLC) and
developed markets (MXWOLC) and show that, on average, the ARs for the large cap index in
emerging markets are similar to the ARs for the large cap index in developed markets.
Figure 3 displays the daily ARs for small cap between emerging (MXEFSC) and
developed markets (MXWOSC) and show that, on average, the ARs for the small cap index
for emerging markets are more negative than the ARs for the small cap index for developed
markets, especially right after the WHO announcement. We further examine the CARs for
both large cap and small cap in emerging and developed markets in Table 2, Panels A
and B.
We find that the CARs for large cap in emerging markets are not significantly lower than
the CARs for large cap in developed markets across all event windows and also for both
Carhart and GARCH(1,1) models. In contrast, we find that the CARs for small cap in emerging
markets are significantly more negative than the CARs for small cap in developed markets.
The CARs for small cap in the emerging markets are 2.76–4.9% lower than the CARs for
small cap in the developed markets. This latter finding provides evidence to support our
second hypothesis (H2) that the market reaction to the COVID-19 pandemic is greater and
more negative for small cap stocks in the emerging markets than small cap stock in the
developed markets. Overall, our findings are consistent with Khawaja and Mian (2008), who

60
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45 Figure 2.
-50
Abnormal returns for
-55
-60
large cap in emerging
-1.20% -1.00% -0.80% -0.60% -0.40% -0.20% 0.00% 0.20% 0.40% 0.60% 0.80%
and developed markets
(Carhart model)
DEV_Large EMER_Large
 60
IJOEM 55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
Figure 3. -45
Abnormal returns for -50
small cap in emerging -55
-60
and developed markets
-3.50% -3.00% -2.50% -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00%
(Carhart model)
DEV_Small EMER_Small

demonstrate that the small cap firms in emerging markets are more adversely affected by
financial turmoil than the large cap firms.
Extant literature shows that financial turmoil has a significant impact on equity valuation.
Schwartz and Moon (2000, 2001) provide evidence that the growth stocks were adversely
affected when the dot.com bubble burst. We examine the ARs for value and growth stocks for
emerging markets (MXEF000V and MXEF000G), and value and growth stocks for developed
markets (MXWO000V and MXWO000G). Figure 4 shows that the ARs for value stocks in
emerging markets are less negative than the ARs for value stocks in the developed markets.
Figure 5 shows the ARs for growth stocks in emerging markets are more negative than the
ARs for growth stocks in the developed markets. Table 3 presents the CARs for both value
and growth stocks in emerging and developed markets. We find that the CAR (
30,þ30) and
CAR (
10,þ10) for value stocks in emerging markets are significantly less negative than the
CARs for value stock in developed markets. In contrast, we find that the CAR (
30,þ30) in
the Carhart model and CAR (
10,þ10) in GARCH(1,1) for growth stocks in emerging markets
are more negative than the CARs in developed markets. Our findings indicate that investors
react less negatively to the emerging markets’ value stocks than the developed markets’ value
stocks. Investors react more negatively to the emerging markets’ growth stocks than the
developed markets’ growth stocks. Overall, we find evidence to support our third hypothesis
(H3), that investors react differently on value vs growth stocks in emerging markets
compared to the developed markets. We observe that the CARs during 60 days after the WHO
announcement on March 11, 2020, for growth stocks in the developed markets were positive
and statistically significant. This implies that the growth stock index, especially for the
growth stock in the developed markets, seemed to make a rebound during the 60 days after
the WHO announcement.
We examine the market reactions to the COVID-19 pandemic across 11 different sectors.
Table 4, Panels A and B, present the CARs for all eleven sectors in both emerging (EMER) and
developed (DEV) markets. We find that the CARs for financial sectors (Fin) in both emerging
and developed markets are negative across all event windows. The financial sectors are
expected to face greater credit risks and contractions in economic growth, which leads to
lower profitability (Birry et al., 2020). We also find some evidence that the CARs for energy
 t-test EMER_LARGE
t-test EMER_SMALL

EMER_ LARGE DEV_ LARGE EMER_ SMALL DEV_ SMALL DEV_LARGE DEV_SMALL

Panel A. Carhart model

CAR (
60,0)
2.90%*
2.07%
3.20%*
2.98%
0.83%
0.22%
CAR (
30, 0)
3.63%***
2.83%**
5.36%***
4.23%**
0.80%
1.13%**
CAR (
10,0)
3.79%***
3.09%***
6.35%***
4.19%***
0.70%
2.16%***
CAR (0,þ10)
7.10%***
6.31%***
9.80%***
7.32%***
0.79%
2.48%***
CAR (0,þ30)
3.04%**
2.13%**
5.56%**
3.93%**
0.91%
1.63%*
CAR (0,þ60)
3.63%* 1.94%
3.77%
1.92%
5.57%
1.85%
CAR (
10,þ10)
10.89%***
9.40%***
16.15%***
11.25%***
1.49%
4.90%***
CAR (
30,þ30)
5.67%**
4.96%**
10.92%**
8.16%**
0.71%
2.76%**
CAR (
60,þ60)
5.53%* 0.12
6.23%
3.02%
5.65%
3.21%
Panel B. GARCH(1,1) model
CAR (
60,0)
9.11%**
7.39%**
12.77%**
10.94%*
1.72%
1.83%*
CAR (
30, 0)
11.87%***
10.55%**
16.21%***
13.49%**
1.35%
2.72%**
CAR (
10,0)
13.12%***
12.16%***
18.22%***
15.83%***
0.96%
2.39%***
CAR (0,þ10)
9.22%***
8.23%***
23.27%***
18.31%***
0.99%
4.96%***
CAR (0,þ30)
5.44%*
4.95%**
11.66%***
9.21%***
0.49%
2.45%***
CAR (0,þ60) 3.86% 4.10 2.07% 2.35%
0.24%
0.28%
CAR (
10,þ10)
19.52%***
18.21%**
33.95%***
30.03%***
1.31%
3.92%***
CAR (
30,þ30)
16.51%***
15.24%**
27.81%***
24.89%**
1.27%
2.92%**
CAR (
60,þ60)
5.46%
3.46%
12.07%
9.30
2.00%
2.77%
Note(s): *, ** and *** represent statistically significant at 10%, 5% and 1% level, respectively. The reported statistical significance is adjusted based on the Bonferroni
correction (Harvey et al., 2020)
disease 2019
Market
reaction to the
coronavirus

Large cap vs small cap

Table 2.
 60
IJOEM 55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
Figure 4. -40
-45
Abnormal returns for
-50
value stocks in
-55
emerging and -60
developed markets -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50%
(Carhart model)
DEV_Value EMER_Value

60
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
Figure 5. -40
Abnormal returns for -45
growth stocks in -50
emerging and -55
-60
developed markets
-2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00%
(Carhart model)
DEV_Growth EMER_Growth

sector (Energy) are negative. These findings indicate that the COVID-19 pandemic
systematically adversely affected these two sectors (financial and energy) in both
emerging and developed markets.
Our untabulated t-test results (t-ratios range between 1.93 and 7.54) indicate that the
CARs for telecommunications (Telec) and healthcare sectors (Health) in emerging markets
 t-test EMER_VALUE
t-test EMER_GROWTH

EMER_ VALUE DEV_ VALUE EMER_ GROWTH DEV_ GROWTH DEV_VALUE DEV_GROWTH

Panel A. Carhart model

CAR (
60,0)
2.25%*
3.01%
3.10%
1.69%*** 0.76%
1.41%
CAR (
30, 0)
2.86%**
3.95%**
4.07%**
2.18%*** 1.09%*
1.89%**
CAR (
10,0)
3.40%***
5.09%***
4.68%***
2.42%*** 1.69%**
2.26%***
CAR (0,þ10)
4.43%***
4.50%***
6.04%*** 2.20%*** 0.07%
3.84%***
CAR (0,þ30)
3.39%**
4.11%**
2.28%** 4.44%*** 0.72%
6.72%**
CAR (0,þ60)
2.87%
2.24%
1.95% 6.86%***
0.63%
8.81%
CAR (
10,þ10)
7.83%***
9.59%**
10.11%** 0.51% 1.76%*
10.62%
CAR (
30,þ30)
6.73%**
8.02%**
6.64%** 2.01%** 1.29%*
8.65%**
CAR (
60,þ60)
5.15%
5.25%
5.38% 4.68%*** 0.10%
10.06%*
Panel B. GARCH(1,1) model
CAR (
60,0)
11.89%*
12.59%
9.38%
10.17% 0.70% 0.85%
CAR (
30, 0)
17.64%**
15.54%**
10.80%***
10.26%**
2.10%**
0.54%*
CAR (
10,0)
18.92%***
16.40%***
11.74%***
10.51%***
2.52%***
1.23%**
CAR (0,þ10)
14.38%***
12.47%***
11.71%***
8.71%***
1.91%**
3.00%***
CAR (0,þ30)
9.33%**
5.82%** 3.98%** 2.12%**
3.51%* 1.86%*
CAR (0,þ60) 2.41% 3.24% 6.58% 14.63%**
0.83%
8.05%*
CAR (
10,þ10)
25.45%***
22.93%***
18.96%***
16.83%***
2.52%***
2.13%***
CAR (
30,þ30)
24.75%**
21.93%**
13.59%**
8.53%
2.82%**
5.03%
CAR (
60,þ60)
14.98%
9.42%
1.28% 4.46%*
5.56% 5.74%
Note(s): *, ** and *** represent statistically significant at 10%, 5% and 1% level, respectively. The reported statistical significance is adjusted based on the Bonferroni
correction (Harvey et al., 2020)
disease 2019
Market
reaction to the
coronavirus

Table 3.
Value vs growth
 Table 4.
IJOEM

Sectors’ analysis
Panel A. Carhart model
EMER_Energy DEV_Energy EMER_Material DEV_Material EMER_Industr DEV_Industr EMER_ConStap DEV_ConStap EMER_ConDisc DEV_ConDisc

CAR (
60,0)
10.59%***
8.76%**
3.38%**
3.73%**
1.83%*
4.82%**
2.69%**
3.55%**
1.97%
1.73%
CAR (
30,0)
14.30%***
14.46%***
4.38%***
4.46%***
2.02%***
6.62%***
3.54%***
3.89%***
4.94%*
0.371%*
CAR (
10,0)
16.01%***
17.50%***
4.94%***
4.57%***
2.26%***
7.93%***
5.00%***
6.76%**
4.98%**
4.53%**
CAR (0,þ10)
2.17%**
2.19%**
3.57%***
1.76%**
3.19%***
2.27%*** 6.21%
1.10**
7.75%**
5.09%**
CAR (0,þ30)
3.76%
3.84%
1.19%* 1.54%
1.48%**
1.34%** 7.72%** 2.13%
1.67%
1.90%
CAR (0,þ60) 7.35% 7.34% 6.14% 7.33% 0.17% 0.50% 8.07%** 3.93%* 5.37% 3.76%
CAR (
10,þ10)
18.54%***
19.42%**
9.56%***
3.97%***
5.03%***
8.89%*** 2.66%
3.79%**
11.37%**
9.61%**
CAR (
30,þ30)
10.42%*
10.97%*
5.97%*
2.23%*
2.90%**
6.59%** 7.83%*
2.86%
6.35%
4.98%
CAR (
60,þ60)
3.66%
3.28% 3.97% 3.61%
0.71%
4.32% 11.31%* 0.39% 3.38% 2.02%

EMER_Health DEV_Health EMER_Fin DEV_Fin EMER_IT DEV_IT EMER_Telec DEV_Telec EMER_Util DEV_Util EMER_RealEst DEV_RealEst

CAR (
60,0)
2.56%
1.89%
2.21%*
4.24%*
1.01%**
0.59%**
0.84%
0.72%
4.04%
3.92%
1.04%
8.44%*
CAR (
30,0)
3.51%*
2.19%*
3.57%**
4.36%**
4.74%***
2.76%***
1.53%**
2.74%**
5.42%**
4.32%**
2.82%**
11.75%***
CAR (
10,0)
4.21%**
4.45%**
4.80%***
6.19%***
6.36%***
3.77%***
3.38%***
3.09%***
8.06%**
5.94%**
8.65%***
10.54%***
CAR (0,þ10)
2.56%**
0.57%*
5.45%***
4.88%***
3.52%**
2.80%**
1.60%***
1.96%***
1.75%**
1.02%*
4.35%**
6.24%**
CAR (0,þ30) 5.91%** 3.01%*
9.28%***
5.01%*** 0.19% 0.80% 3.38%** 0.86% 1.24% 1.38%
6.70%**
8.49%**
CAR (0,þ60) 7.77%** 3.96%
7.77%***
3.73%** 1.19%** 3.97%*** 6.54%** 2.79%** 3.52% 4.95%
7.61%*
6.64%**
CAR (
10,þ10)
6.77%**
4.88%*
12.95%***
11.98%***
11.04%***
6.34%***
4.08%**
2.23%**
9.82%**
6.94%**
8.93%*
18.23%**
CAR (
30,þ30) 2.43%** 0.17%
12.17%***
9.84%***
8.32%**
5.23%** 1.13%*
1.78%
4.82%**
2.98%*
9.94%*
19.94%**
CAR (
60,þ60) 4.23%* 1.99%
7.77%**
7.23%* 0.19% 3.43%* 4.83%** 0.05%
1.90% 1.03%
8.15%
16.53%

Panel B. GARCH(1,1) model

EMER_Energy DEV_Energy EMER_Material DEV_Material EMER_Industr DEV_Industr EMER_ConStap DEV_ConStap EMER_ConDisc DEV_ConDisc

CAR (
60,0)
28.67%***
32.52%**
14.94%***
15.94%***
9.40%***
16.07%***
8.00%***
7.48%***
6.64%
3.53%**
CAR (
30,0)
37.29%***
44.02%***
19.47%***
20.62%***
13.85%***
21.45%***
9.47%***
9.51%***
8.38%
6.03%***
CAR (
10,0)
40.36%**
48.48%**
20.13%***
22.87%***
14.70%***
21.65%***
10.18%***
10.83%***
9.51%*
6.8%***
CAR (0,þ10)
9.42%***
10.55%***
15.98***
9.34%***
16.80%***
13.32%***
11.94%***
11.95%***
11.47%***
10.44%***
CAR (0,þ30) 0.86% 0.28%
6.55%
5.59%
8.72%*
8.68%** 4.46%*
1.36%
2.76% 0.62%

(continued )
Panel B. GARCH(1,1) model
EMER_Energy DEV_Energy EMER_Material DEV_Material EMER_Industr DEV_Industr EMER_ConStap DEV_ConStap EMER_ConDisc DEV_ConDisc

CAR (0,þ60) 18.57%** 18.66%** 8.95% 7.42% 2.29% 8.81% 5.32%** 3.54% 9.46% 6.03%
CAR (
10,þ10)
36.96%**
38.82%**
28.41%***
21.95%*** 24.92%***
26.12%***
19.03%***
16.16%***
15.51%**
13.63%***
CAR (
30,þ30)
35.30%***
36.06%***
23.52%***
16.70%**
21.28%***
25.18%***
6.72%***
7.92%***
9.67%
9.22%*
CAR (
60,þ60)
10.66%
15.58%
8.67%
3.12%
7.13%
8.43%
3.24%
2.70% 3.68% 2.35%

EMER_Health DEV_Health EMER_Fin DEV_Fin EMER_IT DEV_IT EMER_Telec DEV_Telec EMER_Util DEV_Util EMER_RealEst DEV_RealEst

CAR (
60,0) 0.01%
6.50%*
12.15%*** 10.23%***
8.30%***
7.79%
4.21%
11.93%*
11.20%***
5.73%***
5.07%
7.13%*
CAR (
30,0)
4.36%*
8.86%**
17.56%***
17.79%***
9.06%***
9.82%**
7.59%*
12.82%**
17.43%***
10.96%***
8.03%
11.65%**
CAR (
10,0)
5.47%**
10.55%**
19.31%***
19.60%***
11.24%***
14.70%***
7.75%**
15.93%***
18.96%*** 11.59%***
11.70%***
12.30%***
CAR (0,þ10)
10.45%***
12.51%***
17.62%***
13.03%***
6.59%***
8.58%***
5.76%*
11.75%**
15.18%***
15.97%***
15.84%**
22.75%**
CAR (0,þ30) 5.38%* 6.12%*
16.03%***
14.73%** 1.75%**
4.03%** 1.78%
0.58%
6.06%**
5.01%**
13.34%*
12.57%**
CAR (0,þ60) 16.41%** 11.17%*
4.58%
0.28% 2.91%*** 18.41%*** 11.72%** 9.96%*** 3.76% 2.53%
4.95%
2.19%
CAR (
10,þ10)
12.96%**
15.49%**
31.98%***
22.94%***
17.45%***
13.97%***
12.24%**
19.65%***
24.14%***
23.31%***
20.65%**
30.26%**
CAR (
30,þ30) 1.76%*
1.27%
28.16%***
19.29%***
15.23%***
6.24%
4.54%
12.55%**
22.78%***
12.97%**
18.11%*
20.73%**
CAR (
60,þ60) 18.27%* 5.47%
22.28%**
10.92%
3.55%* 15.05%** 7.01%* 2.92%**
8.43% 0.42%
9.18%
5.18%*
Note(s): *, ** and *** represent statistically significant at 10%, 5% and 1% level, respectively. The reported statistical significance is adjusted based on the Bonferroni
correction (Harvey et al., 2020)
disease 2019
Market
reaction to the
coronavirus

Table 4.
IJOEM are positively and significantly larger than the developed markets, while information
technology sectors (ITs) in developed markets are more positive than in the emerging
markets. Overall, we find evidence supporting our fourth hypothesis (H4) that the impact
of the COVID-19 pandemic varied across different sectors in emerging markets and
developed markets. We also find evidence that the COVID-19 pandemic generated
systemic adverse effects on certain sectors (i.e. energy and financial) in both emerging and
developed markets.
The varying impact of COVID-19 across different sectors in emerging and developed
countries presents several implications. First, different impacts provide an opportunity to
investors to increase their returns by investing in sectors that are positively affected by
COVID-19, such as telecommunications and healthcare sectors in emerging countries and
information technology in the developed countries. Second, the differing impacts indicate that
government support is needed for certain sectors that are adversely affected by COVID-19,
such as the energy sector. Third, the adverse impact of COVID-19 on the financial sector
shows the vulnerability of the financial sector during the global pandemic.

Market reactions to the COVID-19 pandemic relative to the 2008 global financial
crisis
Recent studies claim that the COVID-19 pandemic had an unprecedented impact on global
equity markets (Baker et al., 2020; Ramelli and Wagner, 2020). In order to examine this claim,
we compare the market reactions from the COVID-19 pandemic with the market reactions
from the 2008 global financial crisis. We follow extant literature (Fernando et al., 2012;
Johnson and Mamun, 2012) and chose the Lehman Brothers’ bankruptcy announcement on
September 15, 2008, as an event date to represent the 2008 GFC.
Table 5 presents the market reactions to the Lehman Brothers’ bankruptcy announcement
on September 15, 2008. Panel A presents the results from the Carhart model. We find that
both emerging and developed markets reacted negatively to the Lehman Brothers’
bankruptcy announcement. The magnitudes of CARs across all windows for the emerging
markets presented in Panel A are between
3.57 and
12.23%, while the CARs for the
developed markets are between
2.20 and
7.86%. The difference in CARs between
emerging and developed countries is between
3.12 and
4.37%, indicating that the
emerging markets reacted more negatively than the developed markets. The results are
similar when we use the MSCI emerging markets excluding China (EMER Ex-China). The
results from the GARCH(1, 1) model presented in Panel B of Table 5 are economically larger
but are qualitatively similar to the Carhart model. This evidence provides further support to
our first hypothesis (H1) that a global financial crisis tends to affect emerging equity markets
more negatively than developed markets.
We compared the market reactions to the Lehman Brothers’ bankruptcy in Table 5 with
the market reactions from the WHO announcement on COVID-19 in Table 1. We find that the
market reactions to the Lehman Brothers’ bankruptcy in both emerging and developed
markets remained significantly negative during the extended 60 days’ event window after the
announcement. In contrast, the negative market reactions to the COVID-19 pandemic in both
emerging and developed markets dissipated during the extended 60 days after the WHO
announcement on March 11, 2020. This latter finding indicates that the global equity markets
seemed to experience a rebound during the 60 days after the WHO announcement on the
COVID-19 outbreak. Therefore, our finding is consistent with the claim that the global equity
markets’ reactions to the COVID-19 pandemic follow the V-shape curve (Cox et al., 2020;
Pound, 2020).
We conduct a robustness test using the exponential generalized autoregressive
conditional heteroscedasticity (EGARCH) model to account for a potential nonlinear time-
 Market
EMER t-test EMER reaction to the
EMER Ex-CHINA DEV t-test EMER – DEV Ex-CHINA – DEV coronavirus
Panel A. Carhart model disease 2019
CAR (
60,0)
0.52%*
0.64%*
1.48% 0.96% 0.84%
CAR (
30,0)
2.47%**
2.86%**
1.57%*
0.90%
1.29%
CAR (
10,0)
2.48%**
3.26%**
2.31%**
0.17%
0.95%
CAR (0,þ10)
1.10%*
1.46%*
0.88%*
0.22%
0.58%
CAR (0,þ30)
4.99%**
7.35%**
1.77%**
3.22%**
5.58%**
CAR (0,þ60)
14.71%**
8.81%**
6.38%**
8.33%**
2.43%**
CAR (
10,þ10)
3.57%**
3.72%**
2.20%*
1.37%
1.52%
CAR (
30,þ30)
5.51%**
6.95%**
2.39%**
3.12%**
4.56%**
CAR (
60,þ60)
12.23%**
11.70%**
7.86%**
4.37%**
3.84%**
Panel B. GARCH(1,1) model
CAR (
60,0)
14.39%*
14.07%**
8.18%*
6.21%*
5.89%*
CAR (
30,0)
18.67%**
18.07%**
8.63%*
10.04%*
9.44%*
CAR (
10,0)
25.98%**
26.66%**
14.16%**
11.82%**
12.5%**
CAR (0,þ10)
8.93%**
9.25%*
7.20%**
1.73%*
2.05%* Table 5.
CAR (0,þ30)
20.34%***
20.26%***
10.65%***
10.69%***
9.61%*** Market reactions to the
CAR (0,þ60)
30.32%***
36.32%***
21.64%***
8.68%***
14.68%*** Lehman brothers’
collapse (September 15,
CAR (
10,þ10)
29.81%**
29.21%**
13.78%**
16.03%*
15.43%* 2008) cumulative
CAR (
30,þ30)
37.48%***
37.21%***
18.68%***
18.80%***
18.53%*** abnormal returns
CAR (
60,þ60)
43.77%***
42.87%***
21.20%***
22.57%***
21.67%*** (CAR) in emerging
Note(s): *, ** and *** represent statistically significant at 10%, 5% and 1% level, respectively. The reported markets vs developed
statistical significance is adjusted based on the Bonferroni correction (Harvey et al., 2020) markets

varying of the stock returns’ error term. We also conducted non-parametric rank test and
bootstrapping methods. Our untabulated results from the EGARCH model and the non-
parametric rank test and bootstrapping methods are consistent with our results reported in
Tables 1–5. Thus, we believe that our results are robust across different event study
estimation methods.

Conclusions
The COVID-19 pandemic has created massive shockwaves to the financial markets in both
emerging and developed countries. Using an event study method, we demonstrate that the
magnitude of the differences in the CARs between the emerging equity markets and
developed equity markets due to the COVID-19 pandemic are economically significant. The
staggering adverse effects of the COVID-19 pandemic on emerging markets, especially for the
small cap equity index, exert pressure on the governments in emerging markets to rely on
foreign capital inflows to support small businesses that are strapped of capital.
Consistent with existing literature that indicate varying impact of COVID-19 across
different sectors (Bretas and Alon, 2020; He et al., 2020), our findings also indicate that
COVID-19 brought an adverse effect for some sectors (e.g. energy and financial) but it also
brought a positive effect on other sectors (e.g. telecommunications and healthcare) in the
emerging countries. We believe our findings provide evidence that investors could potentially
garner positive abnormal returns by diversifying their risks across different sectors in the
emerging equity markets and at the same time bring critical financial support to forestall the
contagion of COVID-19, protect lives and develop infrastructures to save the economy,
especially for those financially constrained emerging countries.
IJOEM In contrast to the existing literature on growth and value stocks (Schwartz and Moon,
2000, 2001), we find that growth stocks are experiencing a positive market reaction from the
COVID-19 pandemic compared to value stocks. We believe that the COVID-19 pandemic has
shifted the supply and demand for goods and services; specifically, the need for distance
communications, teleconferencing, telecommuting, online commerce and research for
COVID-19 treatments and vaccines increases the demand for over-the-internet related
businesses, and the biotechnology and pharmaceutical industries, to the point that these
businesses are generally considered as growth stocks. However, these gains in growth stocks
are realized primarily in the developed markets.
We also compare the market reactions to the COVID-19 pandemic with the market reactions
to the 2008 GFC, indicated by the Lehman Brothers’ bankruptcy announcement. We find
consistent evidence that emerging markets exhibit greater negative abnormal returns relative
to the developed markets from both events. However, the negative market reactions to the
COVID-19 pandemic have dissipated quickly during the 60 days after the event date, while the
negative market reactions to the 2008 GFC persisted beyond the 60 days after the Lehman
Brothers’ bankruptcy announcement. Thus, we confirm that market reactions to the COVID-19
pandemic follow the V-shape recovery for both the emerging and developed countries.
Our study has several limitations. First, each country could have reacted to the COVID-19
outbreak during different time periods depending on the severity of the COVID-19 outbreak
and health policies that were enacted by each country. Second, the impact of the COVID-19
pandemic across various sectors differs depending on which sectors were immediately
affected by the travel and trade restrictions. Thus, the market reactions cannot be captured
by a single event date. Third, government and central banks’ fiscal and monetary policies
have significant impacts on stock market recoveries. Finally, the literature shows that there is
a greater degree of integration and co-movements among emerging countries, especially
during a financial crisis (Majid and Kassim, 2009). We believe that future studies that
examine pandemic reaction times and co-movements among various emerging markets and
sectors along with the impacts of health, fiscal and monetary policies will further our
understanding of the impact of the COVID-19 pandemic across emerging markets. We also
recommend that future studies focus on examining the long-term impact of the COVID-19
pandemic, especially on equity markets in the emerging countries.

Notes
1. See https://www.who.int/health-topics/coronavirus#tab5tab_1.
2. See https://www.bbc.com/news/business-51829852.
3. Fernando et al. (2012) and Johnson and Mamun (2012) use the September 15, 2008 as the event date
since September 14, 2008 was not a trading day (Sunday). Following Fernando et al. (2012) and
Johnson and Mamun (2012), we also utilize September 15, 2008 as the event date for the Lehman
Brothers’ bankruptcy announcement to examine the market reactions to the 2008 global financial
crisis.
4. See https://www.msci.com/index-solutions.
5. See MSCI Global Investable Market Indexes (GIMI) methodology for emerging and developed
countries at https://www.msci.com/market-cap-weighted-indexes.
6. See http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#International.
7. See http://www.eventstudy.com/wp/.
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Appendix 1 Market
reaction to the
coronavirus
Emerging/ disease 2019
Objectives and main Developed
Studies findings countries Methodology Implications

Cheung et al. The global financial crisis China, Russia, Regression Linkage between the US
(2010) (GFC) has a significant Japan, Hong market and other global
adverse spillover effect on Kong, markets, both the short-
the stock markets in both Australia, UK, term and long-term
developed and emerging and US relationships, were
countries until March 2009 strengthened during
the GFC
Fidrmuc and The GFC causes adverse China and India Regression Transmission of GFC
Korhonen impact on Asian emerging occurs via trade ties
(2010) economies with a significant
adverse effect, especially on
countries with greater trade
ties with the OECD countries
Llaudes et al. The adverse impact of the 50 emerging Regression There is long-lasting
(2010) GFC across 50 emerging countries impact of the GFC on the
markets is significantly emerging countries
greater than on the
advanced countries and the
impact continues until the
first quarter of 2009
Berkmen et al. Countries with more 121 low income Regression Trade channel plays an
(2012) leveraged domestic financial and 40 important role on the
systems and more short- emerging effect of Lehman’s
term debt tend to suffer countries bankruptcy, especially
larger losses in output. Both for developing countries,
financial (i.e. borrowing indicating a spillover
from developed countries) adverse effect from the
and trade (i.e. export) globalization
channels play important
roles on the effect of
Lehman’s bankruptcy for
emerging and developing
countries
De Haas and There is adverse negative OECD and non- Regression Adverse impact is larger
Van Horen impact on the cross-border OECD in emerging countries
(2012) bank lending, especially in (emerging) due to higher financial
the emerging markets due to countries constraints
greater financial constraints,
over one year after the
announcement
Wang (2014) Examination of the impact China, Hong Regression Strength among East
of the GFC over four years Kong, Taiwan, Asian stock markets
after the crisis and finds that South Korea, increases after GFC,
the GFC strengthened the Japan, and US indicating a
link among stock markets in regionalization in East Table A1.
East Asia during the post Asia Summary of relevant
crisis literature and
contributions of
(continued ) this study
IJOEM Emerging/
Objectives and main Developed
Studies findings countries Methodology Implications

Danso and The GFC causes adverse South Africa Regression There is spillover effect
Adomako impact on firms’ capital and Nigeria of GFC on the emerging
(2014) and structure in South Africa countries in Africa
Njiforti (2015) and the stock market in
Nigeria
Becchetti and There were positive stock US firms Event Study There are short-term
Ciciretti abnormal returns during the positive market
(2011) three-days’ event window of reactions to the Lehman
the Lehman bankruptcy bankruptcy for firms
announcement for firms with greater social
with stronger corporate responsibility
social responsibility performance
performance
Fernando The adverse impact of the US firms Event Study The Lehman
et al. (2012) Lehman bankruptcy bankruptcy has
announcement during the spillover effects on
30 days’ window is upstream and
significant on the equity downstream financial
markets and investment institutions
banking services
Johnson and The adverse impact of the US firms Event Study The impact of Lehman
Mamun (2012) Lehman bankruptcy bankruptcy remains
announcement on financial beyond 30 days
institutions and the stock
market continues until the
first quarter of 2009
Baker (2016) The adverse impact of the S&P500 VIX Event Study The impact of Lehman
Lehman bankruptcy on the Index bankruptcy remains
stock markets persisted over beyond 30 days
four months after the
Table A1. bankruptcy announcement

Appendix 2
Bonferroni correction calculation
function [Threshold, NumberRejected] 5 Bonf(pvalue,alpha);
/*Determine how many hypotheses are in the set*/;
M 5 length(pvalue);
/*Determine Bonferroni adjusted threshold*/;
threshold5 alpha/M;
/*Find significant hypotheses*/;
NumberRejected 5 sum(pvalue 5< threshold);
/*Convert Bonferroni corrected pvalue into tstat*/;
Threshold 5 –norminv(threshold/2,0,1);
Source(s): Appendix 1 (pg. 241) of Harvey et al. (2020).

About the authors

Maretno Agus Harjoto is a Professor of Finance at Pepperdine University Graziadio Business School.
Dr. Maretno Agus Harjoto received the 2009 Moskowitz Prize Award from the Center for Responsible
Business, University of California Berkeley for his research on the Economics and Politics of Corporate
Social Performance. His research focuses on COVID-19, corporate governance, board diversity and
corporate social responsibility. He holds the Denney Chair and the Julian Virtue Professorship awards. Market
He has published in various journals, such as Journal of Business Research, Journal of Banking and
Finance, Financial Management, Journal of Corporate Finance, Journal of Business Ethics, Business reaction to the
Ethics: The European Review, and Business and Professional Ethics Journal. Maretno Agus Harjoto is the coronavirus
corresponding author and can be contacted at: maretno.harjoto@pepperdine.edu disease 2019
Fabrizio Rossi is an Adjunct Professor of Economics and Business Organisation at the University of
Cassino and Southern Lazio, with a Ph.D. in Management Engineering. He holds the National Scientific
Qualification as Associate Professor of Corporate Finance and Economics of Financial Intermediaries.
His research interests focus on COVID-19, corporate finance, corporate governance, corporate social
responsibility and intellectual capital and financial performance of firms. He has published in various
journals, such as Journal of Business Research, Research in International Business and Finance,
Corporate Governance: the International journal of business in society, Management Decision, Journal of
Economics and Finance, Journal of Financial Economic Policy, Applied Economics.

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