Vertical integration and corporate value under uncertainty shock: Evidence from the COVID-19 pandemic

Using the exogenous shock of the COVID-19 pandemic, we examine whether vertical integration creates value for firms when facing increasing uncertainty. Using cross-sectional data during the outbreak of the COVID-19 pandemic, we find that there is a significant and positive correlation between vertical integration and cumulative abnormal return in the event window of the COVID-19. Furthermore, when external transaction costs are higher or internal organization costs are lower during the COVID-19 pandemic, the above results are more pronounced. Our results indicate that vertical integration could avoid uncertainty, reduce transaction costs, hence improving corporate value, providing empirical evidence for theories about the uncertainty and vertical integration in transaction-cost economics.