“Impact of the COVID-19 outbreak on stock returns of Indian healthcare and tourism sectors”

The rapid spread of the novel coronavirus pandemic (COVID-19) has adversely impacted global economies and stock markets. This study employs an event study methodology to assess the impact of COVID-19 on stock returns in the healthcare (66 stocks) and tourism (39 stocks) sectors in Indian markets surrounding two events: a) the first COVID-19 case reported in India and b) the announcement of a nationwide lockdown. The findings indicate that investors’ reactions to both events were distinct and asymmetric in healthcare and tourism sectors. The tourism sector stocks react more negatively to the second event than the first, with –2.46% vs. –0.59% event day abnormal returns, respectively. The corresponding figures for healthcare sector stocks are –0.68% and –0.16%, respectively. As expected, pandemic events had a minor negative impact on the healthcare sector. Surprisingly, the tourism industry did not react negatively to the first event. Investors in the tourism industry underreacted to the first reported case; they could not predict the potential consequences and then overreacted to the lockdown announcement. The findings support the behavioral finance theory of underreaction and overreaction, particularly in stressful situations. The study has implications for investors and money managers looking for profitable investment opportunities due to temporary dislocations in stock prices caused by investors’ irrational reactions to certain black swan events.


INTRODUCTION
https://economictimes.indiatimes.com/news/politics-and-nation/india-will-be-undercomplete-lockdown-starting-midnight-narendra-modi/articleshow/74796908.cms Military conflicts, pandemic outbreaks, and global financial crises trigger negative stock market reaction. These events disrupt economic activities and increase risk, drag global stock markets. The COVID-19 outbreak and its rapid spread emerged as a black swan event that triggered global healthcare and economic crises. Lockdowns, travel restrictions, and other intense measures deployed by various countries to contain the spread resulted in crawling economic activity, causing a significant drop in global financial and commodity markets (Hunjra et al., 2021). Most countries witnessed overwhelmed healthcare systems and worsening economic crises. India, a large developing country with a large population and little fiscal bandwidth, faced a challenge to strike a delicate balance between containing the spread of the pandemic and supporting economic activities. Indian government declared a 21-day nationwide lockdown on March 24, 2020. It resulted in the suspension of transportation, educational services, and various industries. 1 Such policy decisions restricted people's movement, caused a significant drop in domestic demand and exports, and had an overall adverse economic impact.
Global experience shows that the COVID-19 outbreak has adversely impactedstock returns across markets and sectors (Baker et al., 2020; Anh & Gan, 2020; Al-Qudah & Houcine, 2022), but such impact varied across countries and sectors. For instance, travel, tourism, and hospitality industries bore the brunt of travel restrictions and were among the worst-affected sectors globally (Foo et al., 2020;Sharma et al., 2021).
While sectors such as travel and tourism suffered, COVID-19 provided opportunities for growth in the healthcare and pharmaceutical industries. Given these disparities, it is critical to assess the impact of events such as a) the first reported COVID-19 case and b) the announcement of a nationwide lockdown on the stock returns of the Healthcare and Tourism sectors in India, a large emerging economy and the stock market. Most studies showed COVID-19's adverse impact on global stock markets. The impact, however, was asymmetric across countries and sectors. For example, hospitality and tourism were among the hardest hit sectors, whereas sectors such as healthcare and pharmaceutical saw a positive reaction after the initial negative reaction.

LITERATURE REVIEW
Given the numerous vital events, beginning with the COVID-19 outbreak in India, it is critical to examine the impact of various events on the stock returns of sectors with diverging fortunes (i.e., healthcare and tourism) linked to a COVID-19 outbreak and subsequent containment measures such as a nationwide lockdown. Based on the study's literature review and aim, the following research hypotheses have been framed.
H1a: The first reported COVID-19 case has no impact on stock returns in the healthcare sector.
H1b: The first reported COVID-19 case has no impact on stock returns in the tourism sector.
H2a: The news of the nationwide lockdown to contain COVID-19 has no impact on stock returns in the healthcare sector.
H2a: The news of the nationwide lockdown to contain COVID-19 has no impact on tourism sector stock returns.

METHODOLOGY
The S&P Bombay Stock Exchange (BSE) Healthcare Index, which includes stocks from hospitals, pharmaceuticals, and medical testing labs, has been used as a proxy for the healthcare sector in the study. Because there is no specific index in the tourism sector like there is in the healthcare sector, the study relies on the sectors available on www.moneycontrol.com, a popular business and financial market web platform in India. The Tourism sector proxy comprises stocks from Hotels-Resorts-Restaurants (34 firms) and Airlines (5 firms).
The study deploys a standard event study methodology (Brown & Warner, 1985) to The study focuses on two key events: 1) the first reported COVID-19 case and 2) the announcement of the nationwide lockdown. Daily adjusted stock prices fromCapitaline databaseare used to calculate stocks returns. The market model (equation 1) estimates model parameters from AD-220 to AD-21 days, where AD is the event day. S&P BSE Sensex, a bellwether and the oldest Indian stock market index is used as a market proxy.
The study employs a variety of event windows ranging from AD -1 to AD + 1 days to AD -20 to AD + 20 days around both events. Equation 2 below is used for calculating the abnormal returns of a stock on a given day.
where R it = return of stock i on day t; R mt = market return on day t; α i and β i are regression parameters computed for each stock from the estimation period (non-contaminated window); ε it has an expected value of zero and a constant variance of σ2 (ε i ) and AR it = Abnormal Return of stock i on day t.
AAR t is calculated as the cross sectional average of all stocks in a sector for day t. Statistical significance of such average abnormal returns is calculated using equation 3. Finally, Cumulative Average Abnormal Returns (CAAR) for each stock are computed for a range of event windows ranging from (0, 1) to (-20, 20). CAAR t is the sum of a stock's daily abnormal returns over the event window. The magnitude and direction of event impact are captured by calculating CAAR across multiple windows. Market reaction to event-related news is not limited to the announcement day itself due to information leakage, underreaction and overreaction by market participants, and various other factors. Equation 3 and 4 are used to calculate the statistical significance of AAR and CAAR, respectively. , where t AAR and t CAAR are t-statistics, N is the sample size, and σ AAR and S CAAR are standard deviations of AAR t and CAAR t , respectively.

RESULTS
The reaction of stocks in the healthcare and tourism sectors in India, a large emerging economy and the stock market, to two important events linked to COVID-19, a black swan event of rare accordance, provides insights into investor behavior to rare events. The study's results are presented in this section.

Healthcare and tourism sectors'
reaction to the first reported COVID-19 case in India (e1) Table 1 displays the AAR and t-statistics for the sectors of interest for the event window spanning AD-20 to AD +20 days surrounding the first event. It demonstrates a significant negative impact of the first reported COVID-19 case on the returns of healthcare and tourism stocks. The healthcare sector's AARs are significant and more negative compared to the tourism sector's AAR. On the event day, the healthcare sector delivered significant negative abnormal returns of -0.68%. Stocks in the tourism sector delivered negative but not significant abnormal returns on the event day. Table 2 shows CAARs and their significance levels for different event windows surrounding first event. It demonstrates that CAARs for the longest event window (-20, 20) are the highest and most positive, but only for the healthcare sector. In the event windows, the sector delivered significantly positive cumulative average abnormal returns, namely (-20, 20), (-10, 10), (-10, 10), and (-5, 5). For the healthcare sector, returns in the post-announcement window were lower than those in the pre-announcement window. In the (0, 2) window, the sector generated significantly negative CAARs of 1.15%. Except for a negative CAAR for the (-3, 3) window, the tourism sector had no significant negative im-pact. In summary, based on the results of Table  1 and Table 2, it is evident that stocks in the Indian healthcare sector reacted negatively. In contrast, tourism did not react to the first event.
Thus, the results reject hypothesis H1a but support hypothesis H1b. Table 3 reports the AAR and its significance levels during the event window surrounding the second event. The healthcare sector did not re- Notes: *means Significant at the 10% level, **means Significant at the 5% level, and ***means Significant at the 1% level. act negatively in the run-up to or on the day of the event. The sector delivered significant positive returns in the post event days. In contrast, the tourism sector delivered significant negative ARs two days before, on the day of the event, and the following day. The market anticipated the potential lockdown, but it needed to account for the full impact of such an announcement. While the negative impact on tourism eased after a few days, the overall lockdown announcement was a significant negative event for tourism sector stocks while benefiting healthcare sector stocks. However, the tourism sector had a more significant impact than the healthcare sector. For example, the CAAR in the (0, 1) window healthcare sector was -1.95%, while the CAAR in the tourism sector was -6%. Looking at CAARs for long windows (-10, 10) and (-20, 20), it is clear that the healthcare sector delivered significantly positive returns in the immediate aftermath of the lockdown announcement. In contrast, the tourism sector delivered significantly negative returns. In summary, Table 3 and Table 4 results reveal that stocks in Indian healthcare and tourism sectors showed an initial adverse reaction to the second event; hence, hypotheses H2a and H2b stand rejected. However, after initial adverse reactions, both sectors witnessed contrasting trends; stocks in the healthcare sector reacted positively, whereas tourism sector stocks reacted adversely.

DISCUSSION
The results show that the two events had an asymmetric impact on both sectors. Because there was little knowledge about the potential threat of the disease in early January 2020, the negative reaction to the first event was small and insignificant. It demonstrates that markets underreacted and could not anticipate the consequences of COVID-19. However, by the beginning of March 2020, fear of the disease had begun to spread. Global equity markets plunged when a pandemic was declared on March 11, 2020. Investors were concerned about the stock market's ability to continue operating as the Indian government announced a one-day curfew on March 22, 2020, followed by a 21-day strict lockdown. Fearing the collapse of economic activity, investors overreacted to the lockdown announcement. While all major sectors reacted negatively to the announcement of the lockdown, an examination of long-term-window CAARs reveals that money moved out of the tourism sector and into sectors such as healthcare. The tourism sector would bear the brunt of the travel restrictions and lockdown, while the healthcare sector would benefit from the widespread pandemic. However, due to negative investor sentiment, stocks in the tourism and healthcare sectors reacted negatively to the lockdown announcement. Such temporary disruption allowed prudent investors to rebalance their portfolios, going overweight in healthcare sectors and underweight or exiting tourism sectors, to capitalize on profitable investment opportunities. This evidence supports the findings of Donadelli et al. (2017), who discovered that disease-related news boosted pharmaceutical industry stock prices in US markets. Maneenop and Kotcharin (2020) and Wu et al. (2021) also document a negative reaction on tourism sector stocks due to the COVID-19 epidemic and subsequent events, and our findings are consistent with theirs.
Using the competing theoretical lenses of efficient market hypothesis and behavioral finance theories of underreaction and overreaction, it is clear that markets underestimated the impact of the first COVID-19 case detected in India and underreacted to the event. Markets fell sharply beginning in early March 2020 as it became clear that it would affect the entire world. Markets expected strict measures to limit the contagion spread, and tourism stocks delivered significant negative returns in the days leading up to the lockdown announcement. However, the market did not fully account for such an effect, and markets and stocks in the tourism sector underperformed significantly on the event day. Contrary to the efficient market hypothesis, stocks did not absorb the event-related information on the announcement's day but adjusted over time.
Looking at the asymmetric responses of the healthcare and tourism sectors to both events, it is clear that investors underreacted to the first event and then overreacted by selling healthcare sector stocks and hammering tourism stocks. Such overreaction reversed quickly, and starting on the sixth day after the announcement, returns in the healthcare sector turned positive. The Notes: *means Significant at the 10% level, ** means Significant at the 5% level, and ***means Significant at the 1% level. announcement of the lockdown resulted in the closure of borders and the imposition of travel restrictions. Aside from that, the Indian government made no promises of financial assistance to the tourism industry. 2 The tourism sector's stocks suffered higher cumulative average abnormal losses because domestic and international borders were closed due to the lockdown. Similar

CONCLUSION
The study investigates the immediate impact of two significant COVID-19 events in India on the stock returns of the Healthcare and Tourism sectors. The findings indicate that the announcements about the COVID-19 outbreak have had a small but significant negative impact on the returns on stocks in the healthcare and tourism sectors. Furthermore, the tourism industry experienced negative abnormal returns due to the national lockdown. CAARs comparison of the two sectors reveals that the tourism industry stocks suffered far more than the second event.
On the other hand, the healthcare sector did not react negatively because it could benefit from efforts to contain the pandemic and increased healthcare spending due to increased awareness about the importance of health. The research adds to the existing and growing pandemic literature. The findings of this study can help investors and fund managers understand the impact of a black swan event and how it has an asymmetric impact on stocks in various sectors. It enables them to implement diversification and sector-specific hedging strategies. The study has theoretical implications for market efficiency and behavioral finance because markets overreact and underreact to significant events. Future research should concentrate on the long-term impact of COVID-19 on various sectors, as well as cross-country comparisons.