Florian Nagler - Bocconi University

"Sovereign Debt and Equity Returns in the Face of Disaster", with Thorsten Martin

Abstract

What makes an asset disaster resilient? We empirically study the role of sovereign debt for disaster resilience in a large global sample of firms. Using a novel firm-level measure of sovereign debt, we find that stocks with high (low) firm-level sovereign debt experience an increase (decrease) in their comovement with the global market portfolio in a disaster. This divergence in disaster betas demands a risk premium and high sovereign-debt firms earn higher returns in normal times. In a disaster, analysts turn more pessimistic and disagree more about the long-term earnings growth of high sovereign-debt firms. The results are robust to a host of firm characteristics, within the same headquarter country and industry, and to a broader measure of fiscal constraints. Our findings have important implications for disaster-based asset pricing models and suggest that fiscal constraints are a key driver of asset resilience.

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