The Sectoral Nature of the COVID-19 Shock A Novel Approach to Quantifying its Economic Impact

This paper assesses corporate financial distress in terms of liquidity and risk of insolvency due to the COVID-19 pandemic. We develop a novel multivariate approach to obtain monthly data on sectoral turnover, exploiting real time data to capture the atypical character of industry-specific disturban...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Archanskaia, Liza, Canton, Erik, Hobza, Alexandr, Nikolov, Plamen, Simons, Wouter
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2022
Subjects
Coronaviruses
COVID-19
Insolvency
Pandemics
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Summary:This paper assesses corporate financial distress in terms of liquidity and risk of insolvency due to the COVID-19 pandemic. We develop a novel multivariate approach to obtain monthly data on sectoral turnover, exploiting real time data to capture the atypical character of industry-specific disturbances. By combining these data with corporate financial statements, we evaluate the financial impact of the pandemic on the corporate sector in the EU. Our definition of risk of insolvency takes into account not only the equity position of firms, but also risks relating to overindebtedness. The analysis attempts to control for firms that were financially vulnerable already before the pandemic, thus being prone to become at risk of insolvency also in absence of the COVID-19 turmoil. For the EU as a whole, 25% of firms exhausted their liquidity buffers by the end of 2021 (a practical cut-off date of the analysis, not an assumed end of the pandemic). Therefore, such firms faced higher liquidity needs by the end of 2021, some of which were likely met with external support, but in any case were a challenge for sound firm performance. Further, 10% of pre-shock viable firms appear to have shifted into insolvency status as a result of the COVID-19 crisis. These results appear more prominent in sectors that were affected more by the pandemic and the associated containment measures.