Neng Wang, Columbia Business School Professor, joins Yahoo Finance's Kristin Myers to break down a new study from National Bureau of Economic Research highlighting the risks COVID-19 poses to a company's performance.
KRISTIN MYERS: Welcome back to Yahoo Finance Live. Now, as companies try to navigate how they're going to operate in a post-pandemic world, our next guest says that companies who take the time and also spend the money to mitigate the risks of COVID will perform better than ones who don't.
We're joined now by Neng Wang, Columbia Business School professor. Now professor, you did a study on this, and you found that firms that implemented new and stricter health protocols, and I'm reading from the study here, for employees and customers at the start of the pandemic would be about 15% to 20% worse off than had they done nothing at all. So let's just say you're looking at the here and now, and companies are looking to make protocols as we come out of the pandemic, is the return on investment still there for those companies moving forward from now to spend that money, really to prevent some of these risks?
NENG WANG: Yes, I think the general message we have is that firms that actually, as you said, mitigate early, they tend to do better in the medium and long run. And this is true for both corporate earnings and actually valuation as well. If you use, say, price earnings ratio.
So there's a trade off here. So the idea is, I would say, reasonably straightforward. Even though you, in the early stage or in the short run, you take your initial earnings loss, but then because you will have a stronger and more repeat customers, say, and also higher worker productivity, because your workers are better protected via physical distancing or other measures, so you're actually going to perform better in the medium and longer run. So I would say for firms out there that are considering, those that have financial resources to do that, I would highly encourage them to do that.
KRISTIN MYERS: Now what kind of mitigation moves were you looking at when it comes to this study? So as I was reading this, I thought for example, Delta, and a lot of the airlines coming out and saying that they were going to block that middle seat, obviously taking a huge hit in terms of revenue and ticket sales, some of those airlines have decided that they are now going to try to fully pack those planes full. But what kind of moves and mitigation techniques did you examine?
NENG WANG: Yeah, I think that's individual firm specific. You give a great example with Delta. I would say for airlines, while if you pack your seats very, very full, you, of course, you save costs in the very short term. You have higher bang for the buck for each flight, but remember that travelers are rational. They worry about their health, and they would pull back when they compare Delta versus American, for example, just take two airlines. They will have different considerations. So it's not obvious that, actually, this kind of short term strategy would work.
So in my earlier comment I mentioned about financial resources. I think that's one important reason why certain firms are sort of stuck making short term oriented decisions. Why? Because they have limited financial resources. They worry about their balance sheets.
They try to scramble and find different ways to get there, pennies and dollars somewhere, but that's really, in my view, not sustainable. It's really important to think about survival and sustainable growth. So in that sense, I would highly encourage, and this is why, by the way, you know, some way to provide funding and financial slack and resources to help these companies are actually quite important.
KRISTIN MYERS: Now, as you called it, this is a trade off. At what point will the costs of making some of these mitigation moves actually outweigh what's going to be gained in company performance later? Where is that balance?
NENG WANG: I think, again, that's individual firm specific. Think about two firms. One has a stronger balance sheet. So we would say firms with stronger balance sheet should do more mitigation, just because they are able to afford it. They are, what we say, the marginal cost of funding mitigation is smaller, so I would say, you know, for firms with stronger balance sheet, they should go further out, because it's just much more in their interest.
For firms that have weak balance sheets, I totally understand why they're doing very short term oriented strategy. Sometimes, it is, in some sense, constrained, efficient and optimal for these financially strapped firms. This is where I think some ways of helping the firm get funding and financing can really help, not just for the firm. I mean, we're not talking about just purely helping the firm, but also helping the society, because there's a big issue about externality, right, so the return to private firms in a mitigation and the return for society as a whole are very different. This is the way, I think, efficient and well thought out policies are highly desirable. And there is a lot of cross sectional variation. Yeah.
KRISTIN MYERS: Right. Well, definitely food for thought, especially as we have a lot of legislators trying to think about how much aid that they should be giving to companies in particular. So definitely a fascinating study there. Columbia Business School Professor Neng Wang, thank you so much for joining us today.
NENG WANG: Thank you, Kris.