Working Paper: CEPR ID: DP14831
Authors: Elena Carletti; Tommaso Oliviero; Marco Pagano; Loriana Pelizzon; Marti G. Subrahmanyam
Abstract: This paper estimates the drop in profits and the equity shortfall triggered by the COVID-19 shockand the subsequent lockdown, using a representative sample of 80,972 Italian firms. We find thata 3-month lockdown entails an aggregate yearly drop in profits of €170 billion, with an impliedequity erosion of €117 billion for the whole sample, and €31 billion for firms that becamedistressed, i.e., ended up with negative book value after the shock. As a consequence of theselosses, about 17% of the sample firms, whose employees account for 8.8% of total employment inthe sample (about 800 thousand employees), become distressed. Small and medium-sizedenterprises (SMEs) are affected disproportionately, with 18.1% of small firms, and 14.3% ofmedium-sized ones becoming distressed, against 6.4% of large firms. The equity shortfall and theextent of distress are concentrated in the Manufacturing and Wholesale Trading sectors and in theNorth of Italy. Since many firms predicted to become distressed due to the shock had fragilebalance sheets even prior to the COVID-19 shock, restoring their equity to their pre-crisis levelsmay not suffice to ensure their long-term solvency.
Keywords: COVID-19; pandemics; losses; distress; equity; recapitalization
JEL Codes: G01; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 lockdown duration (C41) | profit drop (E25) |
| profit drop (E25) | equity erosion (D63) |
| profit drop (E25) | financial distress (G33) |
| COVID-19 lockdown duration (C41) | equity shortfall (D63) |
| firm size (L25) | financial distress (G33) |
| insufficient capital (O16) | further distress (Y50) |