The global health impact of COVID‑19 is enormous, with over 776 million confirmed cases and 7,068,677 deaths across the globe as of September 29th, 2024<fnref n="1" />. To protect public health, the intervention response to COVID‑19 has caused a massive negative short-term impact on economies and is likely to have long-term economic and human losses. IMF has warned of unprecedented economic decline since the great depression (Georgieva, 2020). Globalization has enormously increased the interconnectedness and interdependence of different economies. Consequently, the contagious spread of COVID‑19 is not only affecting the local economy but also enabling the contagious spread of economic malaises. Globally, COVID‑19 has unprecedentedly eroded a quarter of gained wealth in the first month of the outbreak (Ali *et al.*, 2020) while differently affecting all sectors (Al-Awadhi *et al.*, 2020; Corbet *et al.*, 2020).

The pandemics have their social and economic costs as they can affect societies, organizations, and financial systems, challenging their resilience (Goodell, 2020). Resilience is defined as an entity’s ability to survive when facing disruptions (Bhamra *et al.*, 2011; Van Der Vegt *et al.*, 2015). The survival of the organizations and the financial systems depends upon their resilience, specifically during pandemics (Bryce *et al.*, 2022; Florez-Jimenez *et al.*, 2024). Historically, the socioeconomic impacts of contagious diseases or pandemics have been known to affect stock markets (Chen *et al.*, 2007; Ichev *et al.*, 2018). After the COVID‑19 pandemic outbreak and the consequent ‘global meltdown,’ scholars (Al-Awadhi *et al.*, 2020) started investigating the impact of COVID‑19 and consequent government responses on stock market behaviors. Such as Xu (2021) investigated the impact of COVID‑19-associated uncertainty on Canadian and the US stock markets and observed that COVID‑19 induced uncertainty hurt the stock return in Canada more severely than in the US. Al-Awadhi *et al.* (2020) observed a negative impact of COVID‑19 cases and deaths on the Chinese stock market. Narayan *et al.* (2020) indicated a positive impact of the government responses to COVID‑19 on the stock market returns in the G7 economies. Ortmann *et al.* (2020) documented a significant change in investor behavior in response to the COVID‑19 pandemic.

The second wave of empirical studies started investigating the impact of COVID‑19 on firm behavior, as Shen *et al.* (2020) observed a negative impact of COVID‑19 on the financial performance of Chinese firms. Using cross-country data, Hu *et al.* (2021) found that COVID‑19 deteriorated firm performance, specifically in countries with poor health and financial systems. The duration and intensity variation of the pandemic and containment have different economic implications for different countries (Caggiano *et al.*, 2020; Maliszewska *et al.*, 2020). Due to the Zero-Covid policy of the Chinese government, the Chinese economy faced strict lockdowns<fnref n="2" /> and their implications. Although, the impact of COVID‑19 on the performance of Chinese firms has already been investigated. However, these studies used predicted values of firm performance (Shen *et al.*, 2020) or daily stock returns (Ren *et al.*, 2021) as a measure of firm performance. Second, none of these studies has explored the impact of COVID‑19 on firm performance by adopting a strategic management perspective, i.e., addressing the COVID‑19 threat by establishing an effective business strategy to signal corporate resilience.

To the best of the authors’ knowledge, this is the first study that strategically investigates the impact of COVID‑19 on firm performance. Using a longitudinal dataset of 2,606 firms listed from 2010 to 2022, we find that the COVID‑19 pandemic adversely affects the performance of Chinese firms, favoring the *real options theory*. However, a timely deployed competitive business strategy enhances corporate resilience and mitigates the adverse effect of COVID‑19 on firm performance, favoring*the dynamic capabilities view*. More specifically, an in-depth analysis reveals that the firms with a proactive business strategy showed better resilience during the COVID‑19. Our results also reveal that the state-owned firms and larger firms showed better resilience during COVID‑19 by formulating a competitive business strategy than non-state-owned and smaller firms. Finally, we ensure by using firm fixed effects, 2SLS, and propensity score matching (PSM) estimations that our results are not subject to endogeneity.

Our study contributes to the COVID‑19, business strategy, and corporate resilience literature in manifolds. *First*, we extend the COVID‑19 literature by pioneering the strategic investigation of the COVID‑19 and firm performance nexus. *Second*, we contribute to the strategic management literature by documenting that a proactive business strategy enhances corporate resilience and mitigates the adverse impacts of pandemics such as COVID‑19 on firm performance. *Third*, we extend the corporate governance and strategy literature by highlighting that the same business strategy may have different implications for firms depending on their ownership structure (i.e., state-owned or non-state-owned) and size (i.e., larger and smaller firms). These findings may help corporate managers better understand organizational needs and devise effective business strategies to enhance corporate resilience to cope with pandemics like COVID‑19.

The rest of the paper is structured as follows: Section 2 develops hypotheses based on the relevant COVID‑19, firm performance, business strategy, and corporate resilience literature. Section 3 presents the data and empirical framework. Sections 4 and 5 present and discuss the results, respectively. Finally, section 6 concludes the paper.

<footnote n="1">https://data.who.int/dashboards/covid19/cases?n=c; accessed on October 17th, 2024.</footnote>

<footnote n="2">https://www.reuters.com/world/china/what-is-chinas-zero-covid-policy-how-does-it-work-2022-11-03/</footnote>
# Literature review

The COVID‑19 pandemic has been a severe health emergency globally, as more than 7 million people have died since its outbreak. More or less, all economies around the globe are affected by this pandemic. Due to the contagious nature of this disease, people were forced to adopt quarantine measures, go out less, and keep their distance from each other. The enforcement of these policy measures had a significant negative impact on aggregate consumption and demand for goods and services worldwide (Hu *et al.*, 2021; Shen *et al.*, 2020). On the one hand, the policy measures such as lockdowns and quarantines have been strictly enforced in China.

On the other hand, several countries imposed import restrictions on China as the origin of the COVID‑19 outbreak. Consequently, the local and international demand for Chinese products decreased and China’s gross domestic product (GDP) also dropped by 6.8% during the 1<sup>st</sup> quarter of 2020 (Shen *et al.*, 2020). Reduced demand resulted in fewer sales and the associated internal cash flows that are considered to be the bloodline for the firms. The corporations’ investment, financing, and operational decisions are substantially linked to the cash flows. A decrease in cash flows may lead to a decrease in corporate investments and, consequently, corporate performance (Ren *et al.*, 2021; Shen *et al.*, 2020). The empirical evidence also shows that COVID‑19 hit the financial markets severely, increasing stock returns volatility (Chowdhury *et al.*, 2022; Narayan *et al.*, 2020; Xu, 2021), decreasing liquidity (Just *et al.*, 2020), and increasing the cost of equity (Ke, 2022). Reduced and volatile internal cash flows, along with the increased cost of equity, weaken the operating/financial flexibility of the firms and, consequently, their performance (Feng *et al.*, 2022; Liu *et al.*, 2021). Based on these arguments and the significant COVID‑19 literature, we develop our first hypothesis as under:

```
***H1:****The performance of Chinese
              firms dropped during the COVID‑19 crisis.*
```

A competitive business strategy in practice involves a broad range of strategic and tactical decisions, including product pricing and differentiation, investment in production and distribution facilities, contracting with customers and suppliers, spending on research and development, and building human capital (Shapiro, 1989). The *resource-based theory*(Wernerfelt, 1984) argues that a firm’s competitive advantage is based on its access to internal resources (i.e., capital, human, R&D, and technology) and external operating environment. By effectively deploying its resources, a firm can devise a competitive business strategy and successfully align it with the external operating environment to bring resilience to the firm and enhance its performance (Kaplan *et al.*, 2008; Maury, 2022; Thaher *et al.*, 2022). Organizational learning over time enhances a firm’s strategic capabilities, competitive business strategy, and, consequently, firm performance (Santos-Vijande *et al.*, 2012). For example, Chang *et al.* (2021) indicate that a strategic fit between customers and suppliers increases firm performance. Li *et al.* (2022) suggest that the strategically devised digital capabilities of Chinese firms enhance their performance. Maury (2022) concludes that strategically aligned CSR activities enhance the performance of firms operating in 23 developing countries. In particular, Maury (2022) shows that a proactive business strategy positively impacts firm performance. Cheema-Fox *et al.* (2021) argue that the firms signaling corporate resilience by adopting proactive strategies during COVID‑19 such as limiting lay-offs, paying sick leaves, and providing flexible working schedules, experienced lesser negative returns.

The firms deploy a competitive business strategy by exploiting their resources to attain a competitive advantage. However, the question is how to sustain the competitive advantage (Rumelt *et al.*, 1994). The rapidly changing operating environment makes it difficult for firms to remain competitive by having control over scarce resources only (Wernerfelt, 1984). They need to consider managerial strategies to develop new capabilities. The *dynamic capabilities view* refers to the ability of firms to sustain competitive advantage by deploying their dynamic capabilities (Teece *et al.*, 1997). The term “dynamic” refers to the ability of firms to continually revive their competencies to align with a changing operating environment. This requires innovative responses, especially when precise timing is crucial, technological change is happening rapidly, and future competition and market conditions are hard to predict. The term “capabilities” underlines the important role of strategic management in successfully adapting, integrating, and reorganizing an organization’s internal and external skills, resources, and functional competencies to align with the demands of a changing operating environment (Teece *et al.*, 1997).

Empirical evidence using resource-based and dynamic capabilities frameworks concludes that the integration of corporate capabilities enhances firms’ resilience by making them more proactive, which significantly affects their performance (Iftikhar *et al.*, 2021; Makkonen *et al.*, 2014). Considering the *resource-based* and *dynamic capabilities* views and the related empirical evidence, we hypothesize that a business strategy devised according to the available resources and dynamic capabilities can attain as well as sustain corporate competitive advantage in a rapidly changing operating environment and consequently contribute to corporate resilience and enhance corporate performance (Ahsan *et al.*, 2022; Iftikhar *et al.*, 2021; Maury, 2022; Teece *et al.*, 1997; Wernerfelt, 1984). These arguments lead to our second hypothesis:

```
***H2:****A competitive business
              strategy is a determinant factor in Chinese firm performance.*
```

COVID‑19-associated policies (i.e., economic shutdowns, travel restrictions, and import bans, among others) created uncertainty about the financial outcomes and increased the information asymmetry between the firms and investors in the marketplace. According to the *real options theory*, corporate managers tend to defer their investments when facing uncertainty due to investment irreversibility (Ahsan *et al.*, 2022; Bernanke, 1983; Trigeorgis *et al.*, 2017). Most empirical studies investigating the impact of different types of uncertainties on firm behavior favor the *real options theory*and it has also been used in strategic management to address the fundamentals of a business strategy (Trigeorgis *et al.*, 2017). For example, Gulen *et al.* (2015) observed a significant negative impact of economic policy uncertainty on the investments of US-based firms. Montes *et al.* (2021) indicated that high political uncertainty weakens the confidence of Brazilian firms and reduces their investments. Mirza *et al.* (2020) observed that rising uncertainty increases corporate risk in China. However, holding back and exploring real options during uncertainties provide managers time to build appropriate strategies to enhance corporate resilience and to manage crises in a better way by devising an effective business strategy integrated with corporate resources (Porter, 1980; Trigeorgis *et al.*, 2017; Wang *et al.*, 2023).

Firms operate in a dynamic environment and if the corporate managers can successfully align their business strategy to their dynamic operating environment, it may enhance their capabilities to operate proactively and reduce the adverse effects of uncertainties (Ahsan *et al.*, 2022; Iftikhar *et al.*, 2021). When facing high uncertainty, corporate managers may adopt one of the two potential business strategies: One, corporate managers may follow a wait-and-see strategy and defer corporate investments until the conditions become more certain (i.e., a defensive business strategy). This strategy will reduce corporate investments; however, it will also decrease corporate risk (Mirza *et al.*, 2020) and provide managers time to transform based on their capabilities (Wang *et al.*, 2023). Recently, in the Chinese context, Ahsan *et al.* (2022) observed that a defensive business strategy can mitigate the adverse effects of economic policy uncertainty on corporate sustainable growth. On the other hand, uncertainty may also provide firms with new investment opportunities (Knight, 1921). Firms with dynamic capabilities may seize these investment opportunities during uncertain times as these firms can revive their competitive business strategy according to the changing operating environment. Dynamic capabilities allow firms to realize new opportunities through the timely conversion of organizational resources into a new competitive advantage (Makkonen *et al.*, 2014; Teece *et al.*, 1997). This proactive business strategy<fnref n="3" /> will boost corporate investments but also increase corporate risk (Mirza *et al.*, 2020; Mirza *et al.*, 2024). If successful, this proactive business strategy brings growth and enhances the firm’s resilience. Further, proactive business strategies during crises may also enhance perceived corporate resilience and impact firm performance (Cheema-Fox *et al.*, 2021). Based on this reasoning, we argue that a competitive business strategy enhances corporate resilience under crises and propose our third hypothesis:

```
***H3:****A competitive business
              strategy (proactive or defensive) weakens the adverse effects of COVID‑19 on the
              performance of Chinese firms.*
```

<footnote n="3">We use a scoring method to measure whether a firm is following a proactive or a defensive business strategy (a higher score indicates a proactive business strategy and vice versa), following prior related studies (Anwar *et al.*, 2016; Maury, 2022; Mirza *et al.*, 2020).</footnote>
# Data and methodology

## Data

We constructed a sample of Chinese companies listed on the Shanghai and Shenzhen stock exchanges between 2006<fnref n="4" /> and 2022 from the China Stock Market and Accounting Research (CSMAR) database. CSMAR is one of the largest databases providing accounting data for Chinese-listed financial and non-financial firms (Ahsan *et al.*, 2022; Bin-Feng *et al.*, 2022; He *et al.*, 2020; Mirza *et al.*, 2020). Due to the differences in their accounting methods, we only consider non-financial enterprises and exclude those in the finance and insurance sectors. We also removed ST<fnref n="5" /> (Special Treatment) and ST* class firms from our sample due to their abnormal financial conditions and firms with missing values for relevant data during the study period. After applying the filters above, we end with a dataset of 2,606 Chinese firms with a total of 19,677 firm-year observations.

## Variables

This study investigates the impact of COVID‑19 and business strategy on the performance of Chinese firms and the moderating effect that business strategy has on the relationship between COVID‑19 and firm performance. Given that firm performance is our primary outcome variable, we measure it using Tobin’s Q (*TBQ*) and market-to-book ratio (*MTB*) because these proxies of firm performance better incorporate the impact of COVID‑19 induced information asymmetry as well as the impact of deferred investments due to increased uncertainty after the outbreak of COVID‑19 (Ahsan *et al.*, 2021). Following prior studies (Ahsan *et al.*, 2021; Bhagat *et al.*, 2019; Wu *et al.*, 2020), Tobin’s Q (*TBQ*) and market-to-book ratio (*MTB*) is measured as the market value of equity plus total liabilities scaled by total assets and market value of equity divided by the book value of equity, respectively. We operationalize our proxy of the COVID‑19 pandemic using a dummy variable that takes the value of 1 for 2019 and 2020 and 0 otherwise. To measure business strategy (*STG*), we follow Bentley *et al.* (2013) and calculate five years moving averages of six indicators mentioned in Table 1. We then divide these averages into five quantiles and assign a value of 1 to the smallest quantile and 5 to the largest quantile. Next, we grouped these assigned quantile values for all the six indicators providing us with a maximum value of 30 and a minimum value of 6. A higher value represents a proactive business strategy, while a lower value represents a defensive business strategy (Ahsan *et al.*, 2022; Maury, 2022; Mirza *et al.*, 2020).

Further, we include board structure and firm characteristics in our models as they may impact firm performance and strategy (Ahsan *et al.*, 2022; Haque *et al.*, 2022; Ren *et al.*, 2021). We take board size (BDS), board independence (BDI), gender diversity (FBD), CEO-Chairman-duality (DUL), ownership concentration (OCN), firm size (FSZ), financial leverage (FLV), and cash flow ratio (CFR) as control variables following similar studies (Ahsan *et al.*, 2022; Bin-Feng *et al.*, 2022; Haque *et al.*, 2022; Ren *et al.*, 2021).

## Empirical models

To investigate the impact of the COVID‑19 pandemic on the performance of Chinese firms (H1), we develop the following econometric model:

where *FP*<sub>*it*</sub> represents one of the two proxies of firm performance (*TBQ*/*MTB*) of firm *i* at time *t*. *CVD*<sub>*i*</sub> represents the COVID‑19 period. Based on related literature (Ahsan *et al.*, 2022; Jabbouri *et al.*, 2020; Mirza *et al.*, 2020), *Cont*<sub>*it*</sub>represents several corporate governance and firm-level control variables. Corporate governance variables are board size (*BDS*), board independence (*BDI*), the ratio of female directors on board (*FBD*), CEO duality (*DUL*), ownership concentration (*OCN*), and firm-level variables are firm size (*FSZ*), financial leverage (*FLV*) and cash flow ratio (*CFR*). *FP*<sub>*it*</sub> and*Yr*<sub>*t*</sub>represent industry and year-fixed effects, respectively. ε<sub>*it*</sub> represents standard errors. All variables are defined in Table 1.

<table><caption>Table 1 — Definition of variables — Note: Continuous variables were winsorized at the bottom 1% and top 99% levels.</caption><tr><td>Variable NameSymbolDefinitionTobin’s Q ratioTBQThe market value of equity and total
            liabilities, all divided by total assets.Market-to-book ratioMTBThe market value of
            equity to book value of equity.COVID-19CVDA dummy variable coded 1 for the years 2019
            and 2020, and 0 otherwise.Business strategy STGA cumulative score based on five years
            moving averages of six indicators: R&D Investment / Operating IncomeOperating Income
            / Number of EmployeesOperating Income Growth Rate)(Sales Cost + Management Fee) /
            Operating Income)Rate of Employee VolatilityNet Fixed Assets / Total AssetsThe averaged
            indicators are grouped into five quantiles, assigning 1 for the smallest quantile and 5
            for the largest. Then, grouping scores for the six indicators are summed to give a
            strategy score (BST), which ranges from 6 to 30.A higher score indicates an aggressive
            business strategy and vice versa.Board sizeBDSTotal number of directors on the
            boardBoard independenceBDIThe ratio of independent directors to total directors on the
            boardFemale directors’ ratioFBDThe ratio of female directors to total directors on the
            boardCEO dualityDULA dummy variable coded 1 if the chairman and the CEO are the same
            person, and 0 otherwise.Ownership concentrationOCNShareholding percentage of the largest
            shareholderFirm sizeFSZNatural logarithm of total assetsFinancial leverageFLVTotal
            liabilities / Total assetsCash flow ratioCFROperating cash flows / Total
            liabilities</td></tr></table>

Next, to investigate the impact of business strategy on the performance of Chinese firms (H2), we modify our baseline model as under:

Finally, to investigate the moderating impact of business strategy on the relationship between the COVID‑19 pandemic and firm performance, we extend our baseline model as under:

where *STG*<sub>*it*</sub> represents the business strategy score of firm***i*at time *t*. *CVD*<sub>*i*</sub>*x STG*<sub>*it*</sub> represents the interaction term of the COVID‑19 pandemic with the business strategy score of firm***i*at time *t*. Other variables are the same as explained in Equation 1.

<footnote n="4">We use five years of moving average of the variables to measure corporate business strategy (STG), therefore, our final dataset used for regression analysis is for the period from 2010 to 2020.</footnote>

<footnote n="5">Special Treatment Class companies are those companies, that are confronting financial troubles or other unusual difficulties in the Chinese stock market.</footnote>
# Discussion

The study underlines the unprecedented economic impacts of the COVID‑19 pandemic, which has caused enormous distress and disruption across the globe, challenging the resilience of societies, organizations, and financial systems. Resilience, defined as the ability to withstand disruptions (Bhamra *et al.*, 2011; Van Der Vegt *et al.*, 2015), emerges as a critical factor in determining the survival of organizations and financial systems, particularly during pandemics. The contribution of the study lies in its strategic investigation into the nexus between COVID‑19 and firm performance, offering insights into how corporate resilience can navigate the challenges posed by the pandemic. The findings indicate that firms employing proactive business strategies exhibit better resilience during the pandemic, aligning with the *dynamic capabilities view*. These findings imply that firms with dynamic capabilities effectively integrate their resources to attain and sustain competitive advantage, which consequently enhances their resilience and ability to be more proactive in seizing the opportunities left by their competitors (Ahsan *et al.*, 2021). These results favor the findings of Iftikhar *et al.* (2021), indicating that integration of supply chain capabilities develops corporate resilience and makes firms more dynamic. These results also favor the findings of Cheema-Fox *et al.* (2021), who argue that the firms signaling better corporate resilience through proactive business strategies experienced lesser negative returns.

Moreover, the study reveals that the effectiveness of these strategies varies depending on factors such as ownership structure and firm size, shedding light on nuanced implications for different types of firms. Specifically, a proactive business strategy mitigates the negative impact of COVID‑19 for the state-owned and larger firms only. The state-owned and larger firms have financial flexibility due to their better access to resources (Bin-Feng *et al.*, 2022; Gertler *et al.*, 1994). Financial flexibility improves corporate resilience and the ability of the firms to be more proactive (Khan *et al.*, 2021); therefore, the state-owned and larger firms had a higher ability to deploy a proactive business strategy when experiencing COVID‑19-related challenges.
# Conclusion

The recent COVID‑19 pandemic has put thousands of companies around the world in front of unprecedented challenges and facing tremendous difficulties. However, firms have faced these difficulties differently depending on the extent to which they were resilient to this event. The capacity of firms to develop strategies to signal or enhance corporate resilience was a key solution for many firms during this turmoil period to curb the adverse effects of the pandemic and limit the impacts of the threats. This paper studies the effects of the COVID‑19 pandemic and business strategy on the financial performance of Chinese-listed firms. In particular, it analyzes the moderating role that business strategy plays in shaping the impact of COVID‑19 on firm performance. In other words, it assesses whether business strategies help firms become more resilient in the case of extreme health events such as that of the COVID‑19 pandemic.

The paper uses a large sample of 2,606 Chinese non-financial listed firms covered over the period from 2010 to 2022. It shows evidence that the COVID‑19 pandemic has detrimentally affected firms’ performance, whereas business strategy has increased firms’ resilience during these difficult periods. In particular, the empirical results show that business strategy positively moderates the detrimental effects of COVID‑19 on firm performance. Additional analyses show that the effect of business strategy is more exacerbated in firms that have adopted a proactive rather than defensive business strategy during the COVID‑19 pandemic. We also find that these relationships are more pronounced for state-owned and large firms than non-state-owned and small firms. Our results are robust to a battery of robustness tests and contribute to the growing debate on the role of business strategy during crises.

By extending the literature on COVID‑19, business strategy, and corporate resilience, this study offers valuable insights for corporate managers and policymakers alike. It underscores the importance of adapting strategic approaches to mitigate the adverse impacts of pandemics on firm performance. Furthermore, it highlights the need for a nuanced understanding of organizational needs, emphasizing the role of effective business strategies in enhancing resilience to cope with crises like COVID‑19.

In summary, this study contributes to a deeper understanding of the complex dynamics between pandemics and firm performance, offering actionable insights to inform decision-making in the face of unprecedented challenges. Moving forward, further research in this area will be crucial for developing strategies to build resilience and mitigate the impacts of future crises on economies and societies worldwide.

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