[The content of this article has been produced by our advertising partner.] The COVID-19 pandemic has created havoc around the world. Not only did it exact a heavy toll in the loss of human life, but it also constituted one of the biggest shocks to the global economic order in modern history. Consider that in March 2020, as the world became increasingly aware of the spread of the pandemic, global stock markets fell by over 30 percent as investors panicked en masse. Its economic effects were felt everywhere, with neither emerging markets or developed economies spared. Given the massive economic impact of the pandemic, much effort has been focused on whether and how some companies were better able to weather the uncertainty it brought about, while others fell by the wayside. It is with this in mind that a group of researchers, including at The Chinese University of Hong Kong (CUHK) Business School, chose to look at the role of geographical diversification in allowing companies to outperform during the outbreak. The study Geographic Scope and Real Estate Firm Performance during the COVID-19 Pandemic was conducted by Desmond Tsang, Associate Professor at the School of Hotel and Tourism Management and Co-Director of the Centre of Hospitality and Real Estate Research, at CUHK Business School, in collaboration with Dr. Xiaoling Chu at The University of Hong Kong and Prof. Chiuling Lu at National Taiwan University. It found that companies which spread their operations across a wider geographical region tended to be viewed by investors as being better able to withstand the volatility during the pandemic, and this was reflected in their performances in the stock market. “Our aim in this study is to look at how geographic scope and diversification allow firms to weather the economic volatility brought about by the spread of COVID-19 during the pandemic,” says Prof. Tsang. “Unlike other episodes in recent history such as the Global Financial Crisis of 2008, the pandemic affects different places in a different manner, depending on the severity of positive cases in a given region as well as the local government response. This served as an ideal backdrop for us to test out our theories.” Focusing on the Chinese Real Estate Sector To do this, the researchers looked specifically at the stock market performance of real estate firms in China from the beginning of February 2020 to the end of March that same year, a period which coincided with the implementation and subsequent lifting of a lockdown in the Chinese city of Wuhan in Hubei province, where initial reports of virus transmission appeared. They chose China to study the impact of diversification on stock market returns because the country provided a “clean” timeline for study. To control the spread of COVID-19, the government undertook stringent measures, including lockdowns not only in Wuhan but also in other cities throughout the country. Moreover, by focusing on the real estate sector – where firms tend to invest in property assets in specific locations – the researchers were able to clearly identify a company’s geographical scope. Chinese real estate firms were also easier to compare, since most firms tend to dabble in developing residential and commercial projects, unlike in some markets such as the US, where real estate firms focus on various forms of property operations. Finally, real estate developers had a shorter investment horizon than passive investment vehicles such as REIT, or Real Estate Investment Trusts, and thus they might be more likely to be affected by the short-term volatility brought about by the pandemic. To go about their study, Prof. Tsang and his co-authors first examined the returns of A-share companies listed on the Shanghai and Shenzhen stock exchanges with the growth rate of the number of confirmed COVID-19 cases as a measure of exposure to the pandemic. This confirmed the onset of the COVID-19 pandemic caused equity prices for real estate firms in China to fall significantly. As expected, it found that firms that were bigger in size, which employed lower leverage and had higher cash holdings were affected less. Next, the researchers looked into their main research question on whether firms’ geographical scope affected their stock prices during the period. They found that those with broader geographical scope and more geographically diversified property allocations were better able to endure the crisis. “In other words, the results indicate that investors seemed to perceive that firms with a more geographically diversified portfolio as being better able to weather the COVID-19 pandemic,” says Prof. Tsang. The Effects of Leverage and Firm Size Pressing on, the researchers then turned their attention to whether this ability of geographical diversification to shield companies from negative stock market consequences of the pandemic was able to help firms with weak fundamentals. It found that firms with higher leverage reported lower returns during the pandemic no matter their levels of diversification. This was an indication that geographical diversification did little to soften the valuations hit on real estate companies during the pandemic if they had high leverage, which in turn signalled a higher risk of bankruptcy especially at times of crises. Interestingly, when examining firms with strong fundamentals, they found that larger firms were only able to lessen the adverse impact of the pandemic if they adopted a geographically diversified strategy. Conversely, larger firms may be actually be more seriously exposed to the pandemic if they were geographically focused. Prof. Tsang added that while smaller firms, by definition, may find it difficult to expand their portfolio geographically, investors only viewed larger firms in a favourable light if these companies recognised the importance of geographical diversification. To conclude, Prof. Tsang says with the pandemic creating an unprecedented crisis for the world and for global stock markets, it has become increasingly important that firms and policymakers better understand the factors that can allow markets and individual businesses alike to become more resilient to such shocks. “Overall, our results do much to validate what many would consider common sense but not all firms have actually been doing. Corporate diversification, in this case geographical diversification, could be especially useful in mitigating negative stock market reactions that firms experience during times of crises, such as during the pandemic, though its effect is not almighty when it comes to firms with weak fundamentals,” he says. “However, for larger organisations, which typically have access to better resources and are considered to be usually better at absorbing losses when the going gets tough, we see that diversification could actually become more essential, as these firms are expected by the market to be more diversified and to have put fewer eggs in one basket.” Want even more insights? Enjoy the best and most relevant articles monthly with a free subscription to China Business Knowledge @ CUHK 's digest. About the Researcher Prof. Desmond Tsang Prof. Desmond Tsang is an Associate Professor of Real Estate at the School of Hotel and Tourism Management at CUHK Business School. He also serves as a Co-Director of the Centre for Hospitality and Real Estate Research. He obtained his PhD from University of California at Berkeley, majoring in real estate and accounting. His research in real estate specialises in Real Estate Investment Trusts, International Real Estate and Firm Location. His research interests in accounting include CEO and Corporate Governance, Earnings Management, Financial Fraud, and Auditing. Prof. Tsang has published in top journals, such as Review of Accounting Studies, Real Estate Economics, Journal of Real Estate Research and Journal of Real Estate Finance and Economics.