Loss firms during the COVID-19 crisis and the subsequent reversal

Abstract

The COVID-19 pandemic has caused significant disruptions to the global economy. This paper examines firms that reported losses during the first year of the COVID-19 crisis (i.e., 2020) and their subsequent reversals to profitability in 2021. A comparison of data on the COVID-19 crisis with the Global Financial Crisis (GFC) and a general sample period (1976–2021) shows a high frequency and magnitude of losses reported during the COVID-19 crisis. Although the magnitude of losses reported during the COVID 19 crisis is not significantly higher than the losses reported during the GFC, the percentage of loss firms that reversed to profitability is greater after the COVID-19 crisis than after the GFC. This result applies to firms that suffered from the first year of loss as well as to firms with consecutive loss periods of two, three, or four years. While the reversal models based on Joos and Plesko (2005) are able to predict loss reversals in general, the prediction performance of these models is weaker for the GFC and the COVID-19 crisis, especially for firms that incurred more transitory losses. Further analysis shows that the negative relation between market value and earnings in loss firms is reduced when additional value drivers such as research and development (R&D), sales growth, and sustainability are considered.