The COVID-19 Impact on Corporate Leverage and Financial Fragility

November 5, 2021

Preview Citation

Format: Chicago

Sharjil M. Haque, and Richard Varghese. The COVID-19 Impact on Corporate Leverage and Financial Fragility, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Asset and liability management, Asset valuation, Business enterprises, COVID-19, Credit risk, Currencies, Economic sectors, Financial regulation and supervision, Health, Money

Keywords: Asset valuation, Asset volatility, Business enterprises, Business risk, Corporate Debt, COVID-19, Credit risk, Currencies, Debt maturity, Default probability, Default Risk, Distance-To-Default, Global, Impact of the COVID-19 recession, Model-implied optimal leverage, Optimal Capital Structure, Over-leveraged firm, Rollover Risk, Stress Tests

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/265
Stock No:

WPIEA2021265
ISBN:

9781589064126
ISSN:

1018-5941

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