Working Paper: NBER ID: w28104
Authors: Robin Greenwood; Benjamin Iverson; David Thesmar
Abstract: In the wake of the COVID-19 pandemic, the financial and legal system will need to deal with a surge of financial distress in the business sector. Some firms will be able to survive, while others will face bankruptcy and thus need to be liquidated or reorganized. Many surviving firms will need to be downsized or acquired. In normal times, this triage is supported by the court system, banks, and financial markets. The goal of this paper is to size up the coming surge of financial distress, list the challenges it presents in the current environment, and analyze potential policy solutions. Overall, our analysis suggests that the two key issues will be court congestion and excess liquidation and failure of small firms.
Keywords: COVID-19; corporate restructuring; bankruptcy; financial distress
JEL Codes: D22; G33; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 pandemic (H12) | increase in financial distress among firms (G33) |
| increase in financial distress among firms (G33) | increase in bankruptcies (K35) |
| increase in bankruptcies (K35) | challenges in triage process for distressed firms (G33) |
| court congestion and excess liquidation (G33) | challenges in triage process for distressed firms (G33) |
| weaker balance sheets of small firms (G32) | increase in financial distress among small firms (G33) |
| severity and duration of recession (F44) | increase in corporate leverage (G32) |
| higher leverage ratios and fixed costs (G32) | increase in financial distress among small firms (G33) |
| current legal and financial infrastructure (G18) | inefficient outcomes for distressed firms (G33) |