The COVID-19 impact on corporate leverage and financial fragility [electronic resource] / by Sharjil M. Haque, and Richard Varghese.

[Washington, D.C.] : International Monetary Fund, 2021.©2021

Haque, Sharjil M. author.

International Monetary Fund. issuing body.

01-01-2021

1 online resource (49 pages).

text

online resource

IMF working paper ; no. 21/265

IMF working paper ; no. 21/265.

WEB (Copy 1) INTERNET 1325476-1001 ONLINE

Open item 

COVID-19

Public companies

Economic impact

Economic models

Overseas item

"2021 Nov"

Includes bibliographical references.

9781589064126

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.

1325476

1325476-1001

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