Firms prepped for working from home fared better during the pandemic

Firms that prepared well for employees to work from home were more resilient during the pandemic, with stronger operational performances, higher credit ratings and lower costs of debt.

As the COVID pandemic spread across the world in 2020, working from home became the ‘new normal’. Businesses had to adapt quickly to prepare their staff for the change.

New research from Monash Business School reveals that firms that were already well prepared for working from home scenarios have been more resilient during this year’s pandemic, exhibiting higher credit ratings, lower costs of debt and lower default risks.

“When a firm adopts WFH quickly and effectively, ensuring continued productivity and communication with its stakeholders, the firm can mitigate the adverse effect of events like COVID-19 on operations,” says Professor Cameron Truong, from the Department of Accounting.

“However, firms varied greatly in their adaptability of WFH before the outbreak of COVID-19.”

WFH and risk assessment

Yet this is not news to credit agencies, which have been factoring WFH preparedness into their risk assessments for some time.

The study, with co-authors Dr Harvey Nguyen and Dr Mia Pham (both now with Massey University in New Zealand), uses US data and refers to the extent to which a firm is well suited to work from home as ‘WFH preparedness’.

WFH relies on technologies and organisational structures which allow employees to do their job without being in physical proximity with their co-workers.

Better prepared, better performance

Firms with higher WFH preparedness in the study were found to have a higher quality of reported earnings, lower systematic risk, lower cash flow volatility, and higher productivity during the pandemic.

Firms with higher WFH preparedness also held higher credit ratings and lower corporate bond yield spreads – revealing that rating agencies and debt holders incorporate firm-level WFH preparedness in their assessments.

This factor is independent of CEO ability, risk-taking incentives, CEO overconfidence and accounting quality.

The effect of WFH preparedness on corporate default risk during the pandemic was more pronounced in states that were more affected by the pandemic

“It illustrates how WFH is an effective strategy in a firm’s crisis management planning,” says Professor Truong.


Before COVID, firms varied greatly in their adaptability of WFH.

Other factors

Other studies have also revealed other attributes that have helped businesses withstand the impact of COVID-19. They include access to liquidity, high cash holdings, strong balance sheets, high environmental and social ratings and managerial ability.

WFH preparedness really depends on the strategy of top management, the technology that supports WFH, and the hierarchy of the firm and whether it can support a WFH arrangement.

It illustrates how nimble firms can be in dealing with shocks. Professor Truong says that clearly if a firm is larger, has more resources, or is in a high-tech industry it will be more adaptable.

He cites the lightning speed response of Seattle-based Microsoft which instructed its entire workforce to work from home. “This was rolled out across the globe of this huge corporation within just a couple of days,” says Professor Truong.

The study used 4075 observations of United States firms from 2010 to 2016 to determine a firm’s WFH preparedness. A WFH suitability score was constructed for each firm which was then industry adjusted. It compared the firm’s quality of reported earnings, cash flow volatility and productivity as well as credit ratings and bond yield spread.

Firms with different WFH systems were also compared in terms of their default risk during the COVID-19 pandemic.

Firms that were located in city areas or from industries with the highest proportion of jobs that can be done from home unsurprisingly showed higher WFH preparedness.

Many caught unprepared

But while some companies were already able to respond quickly, firms with higher labour intensity or a high proportion of routine-task jobs had lowered WFH preparedness.

“As the COVID-19 pandemic persists and other disasters of such nature may revive in the future, this raises the question how firms should prepare for disaster episodes and the importance of building resilient business operations,” says Professor Truong.

According to Professor Truong, WFH preparedness should become a key element of the non-financial attributes of a firm, similar to environmental, social and governance performance metrics, or employee and customer satisfaction measures.

“This is the first study to build cross-sectional data across thousands of firms to see how they adapt to WFH environments,” says Professor Truong.

While previous work on WFH practices has been based on field studies or surveys within a firm to evaluate the effectiveness of WFH on productivity – this study illustrates how WFH preparedness is a varying indicator in the cross-section of firms.

Rating agencies and debt

Evidence already points to rating agencies and debt capital providers factoring flexible working arrangements into their risk assessments. Professor Truong now sees WFH preparedness as another element to consider for other stakeholders making bank lending and investment portfolio decisions.

“Our findings suggest WFH preparedness is an important contributing factor to resiliency, with the effect translating into a significantly lower cost of debt capital,” he says.

However, more research should be done to investigate the exact mechanisms by which WFH preparedness can curb downside risks for firms.

Another area to consider is the corporate policies and accounting choices that can ensure the effective implementation of WFH in what is likely to be the ‘new normal’ for workplaces around the world.

“Even if we eradicate COVID-19, this practise of WFH will become more popular,” he says.  “Microsoft just recently announced that if employees want to WFH permanently they may do so with manager approval.”

Published on 19 Jan 2021