The Covid 19 Impact On Corporate Leverage And Financial Fragility
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The COVID-19 Impact on Corporate Leverage and Financial Fragility
Author | : Sharjil M. Haque |
Publisher | : International Monetary Fund |
Total Pages | : 51 |
Release | : 2021-11-05 |
Genre | : Business & Economics |
ISBN | : 1589064127 |
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We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.
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