Enterprise value, economic and policy uncertainties: the case of US air carriers

TL;DR

This paper examines how economic and policy uncertainties influence the enterprise value of US air carriers, revealing heterogeneous responses and highlighting the importance of financial health and debt levels.

Contribution

It applies a VAR-MIDAS methodology to analyze the nuanced effects of various uncertainties on airline enterprise value, a novel approach in this context.

Findings

Most firms react negatively to recession and policy uncertainties.

Financial health indicators like current ratio positively influence EV.

High debt levels negatively impact EV during financial shocks.

Abstract

The enterprise value (EV) is a crucial metric in company valuation as it encompasses not only equity but also assets and liabilities, offering a comprehensive measure of total value, especially for companies with diverse capital structures. The relationship between economic uncertainty and firm value is rooted in economic theory, with early studies dating back to Sandmo's work in 1971 and further elaborated upon by John Kenneth Galbraith in 1977. Subsequent significant events have underscored the pivotal role of uncertainty in the financial and economic realm. Using a VAR-MIDAS methodology, analysis of accumulated impulse responses reveals that the EV of air carrier firms responds heterogeneously to financial and economic uncertainties, suggesting unique coping strategies. Most firms exhibit negative reactions to recessionary risks and economic policy uncertainties. Financial shocks also elicit varied responses, with positive impacts observed on EV in response to increases in the current ratio and operating income after depreciation. However, high debt levels are unfavorably received by the market, leading to negative EV responses to debt-to-asset ratio shocks. Other financial shocks show mixed or indeterminate impacts on EV.