Macroeconomic impact and stock returns' vulnerability by size, solvency, and financial distress

We examine how firms' equity value, financing and credit quality respond to changing macroeconomic indicators. We provide evidence that the value of small, low-credit quality, and financially distressed companies are more vulnerable to labor market changes. Our findings show that the equity value of U.S. companies deteriorates when the economy experiences increased cost of capital from an inflation hike, a decrease in domestic output, and uncertainty in the labor market. Our findings are robust to changes in the sample period and after controlling for disparities across industries, states, and firms.

Automated summary

This study finds that small, low-credit quality, and financially distressed companies are more vulnerable to labor market changes, resulting in a deterioration in equity value.