Partisan politics proved most significant factor for speed of corporate shutdowns during pandemic, study shows
LAWRENCE — Whether corporate shutdowns should have occurred during the COVID-19 pandemic remains a hotly debated topic. But what is not debatable is that some firms shut down earlier than others.
New research by three professors from the University of Kansas School of Business finds that the political environment was the most significant factor for how quickly corporations responded.
“Our paper underscores the role regulatory factors and politics play in times of crisis,” said Shradha Bindal, KU assistant professor of finance.
Her paper titled “Corporate Shutdowns in the Time of COVID-19” investigates the speed with which U.S. firms shut down their headquarters because of the pandemic. Among its revelations is that the political orientation of the firms and their CEOs matters. For example, Democrat-leaning CEOs in blue states shut down significantly faster than their counterparts. The research appears in the Journal of Corporate Finance.
Co-written by KU’s Felix Meschke and Kissan Joseph, the paper describes how “during the pandemic, companies had to balance financial viability, employee health and compliance with government directives. This balancing act was complicated by limited information about the virus, conflicting views on mask effectiveness and a polarized political climate.”
Given these challenges, Bindal’s team decided to figure out what aspect of firms or their CEOs most influenced their response to an event affecting the entire global economy.
“We expected that firms with lots of cash would shut down faster,” she said. “These firms were better positioned to weather the crisis. We also expected CEOs to shut down faster if their pay was not tied closely to company stock. We wondered about overconfident CEOs: ‘Do they navigate the crisis more swiftly than others?’”
Since most firms did not announce their shutdown dates, the authors used mobile phone activity data at company headquarters to estimate when employees stopped coming to work. Using this novel methodological approach, the KU researchers found most of these characteristics had no impact. Neither firm incentives nor profits mattered. CEO characteristics such as overconfidence, age and gender didn’t either.
“We were surprised that the main takeaway was how political ideology shaped corporate responses,” she said.
For example, the research found Democratic-leaning firms in blue states shut down 4.39 days before state shelter-in-place orders. Republican-leaning firms in these same blue states delayed shutdowns, closing an average of 3.68 days before such orders. Political alignment between firms and CEOs was a critical driver: Democratic-leaning firms led by Democratic-leaning CEOs shut down an average of 1.5 days earlier. (This accounts for 28% of the sample’s average shutdown time of 5.38 days.)
“We don’t know whether shutting down faster was the right thing to do. Firms that shut down faster did not perform better or worse. We think it could be that Democrats prioritized collective welfare while Republicans emphasized individual liberty,” she said. “This would be consistent with the moral foundations theory made popular by NYU professor Jonathan Haidt.”
Bindal joined KU in 2019. Her research focuses on how institutional investors, product market competition and behavioral biases affect corporate decision making. She said that part of her interest in this research is due to her family background in business.
“My father runs a small hotel back in India. And when COVID came, he had to shut down the hotel — since the Indian government had imposed strict curfews — but he kept all his employees on payroll because he was worried about how they were going to feed their families,” she said.
All CEOs and business owners had to weigh the cost and benefit of such actions during the pandemic.
She said, “We can only speculate that when the environment is uncertain and it is difficult to predict outcomes, CEOs tend to rely on their broader belief system.”