The COVID-19 Pandemic Crisis and

Corporate Finance
Andrew Ellul
Kelley Business School, Indiana University, CEPR, CSEF, and ECGI

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

Isil Erel
Fisher College of Business, The Ohio State University, NBER, and ECGI
Uday Rajan
Stephen M. Ross School of Business, University of Michigan

The COVID-19 pandemic can be considered the third major shock to

have hit the United States and the global economy in the first two dec-
ades of this century. First, we experienced the September 11, 2001, terror
attacks, then the 2008–2009 Financial Crisis, and now the COVID-19
pandemic. Each of these crises confronted the global economy, and the
financial system in particular, with different challenges, with the COVID-
19 crisis likely to be the worst. According to the World Bank (2020), the
global economy is expected to shrink by 5.2% this year, representing the
deepest global recession since the Second World War.
The human loss due to the COVID-19 pandemic continues to be hor-
rific. As of the time this note is written (August 2020), there have been
more than 22 million cases of COVID-19 worldwide, and almost 800,000
deaths. The economic cost has also been severe. For example, at the end
of July 2020, it is estimated that gross domestic product (GDP) in the
second quarter of 2020 fell by 9.5% in the United States, compared to the
previous quarter, and by 10.1% in Germany. The social costs, of lost
employment and the resultant negative impact on the well-being of indi-
viduals and communities, cannot be emphasized enough. Job postings
for the United States tanked by 40% in April 2020 compared to the same
month in 2019, then slowly recovered, but still stood at -20% as of July
2020. Job postings in July 2020 are (approximately) at -40% in France,
-35% in Italy, -50% in Spain, -55% in the United Kingdom, and -25% in
Germany, compared to the same month in 2019 (Financial Times 2020).

The Review of Corporate Finance Studies 9 (2020) 421–429

ß The Author(s) 2020. Published by Oxford University Press on behalf of The Society for Financial Studies.
All rights reserved. For permissions, please e-mail: [email protected].
doi:10.1093/rcfs/cfaa016
Review of Corporate Finance Studies / v 9 n 3 2020

Through our research, we are called on to make a positive contribution

to our communities. As Editors of the Review of Corporate Finance
Studies, we have decided to devote a special issue to the economic impact
of the COVID-19 pandemic on corporations. We felt it was our obliga-
tion and a worthwhile contribution to the bigger debate happening in our
communities on how to, first, lessen the economic toll from the pan-
demic, and, second, best rebuild and reallocate resources once this event
is behind us. Corporations, whether small, medium, or large, or young or
old, are at the very heart of these two challenges, and academic research

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

will be needed to guide policy making.
With this objective in mind, we have collated this issue featuring
papers that are among the best of the early research we have seen written
over the last few months. We cast as big a net as possible in the area of
corporate finance, to mirror the impacts engendered by the pandemic.
The pandemic has upended the cash flows of a large number of corpo-
rations in many countries, with certain segments being significantly more
affected than others. Larger companies, the so-called “workhorses” of
most of our empirical work in corporate finance, face significant head-
winds, including financial distress in some cases. But medium-sized and
smaller companies, which seldom feature in our empirical work, will have
their very survival on the line, in part because of frictions on the financ-
ing side. Thus, the issue features work on both small and large, as well as
private and public, firms.
The issue is organized into three main themes. One set of papers (Li,
Strahan, and Zhang 2020; Acharya and Steffen 2020; Halling, Yu, and
Zechner 2020) considers the “dash for cash” by firms in the United States
during the early part of the pandemic. It is notable that firms were able to
raise substantial amounts of external financing at this time, both by
drawing down lines of credit from banks and by accessing the public
markets. Thus, in the early part of the crisis, financial institutions and
markets (helped also by the strong intervention of the Federal Reserve
Board) performed one of their key functions—allowing corporations to
raise external capital—as well as we could have hoped for.
A second set of papers (Carletti et al. 2020; Schivardi, Sette, and
Tabellini 2020) considers the impact of COVID-19 and the associated
lockdown on the liquidity and equity positions of a large number of
firms, including private firms, in Italy. Two main messages come
through: when the immediate COVID-19 storm has been weathered,
equity shortfalls and debt overhang will be major hurdles for firms in
the longer term, and the issue of zombie financing is likely to become very
relevant.
The third set of papers (Ramelli and Wagner 2020; Albuquerque et al.
2020) examines the corporate characteristics, both those related to firms’
balance sheets and their business models, that drove stock market

422
 The COVID-19 Pandemic Crisis and Corporate Finance

reactions of firms in the early part of the pandemic. In this period, firms
that were especially exposed to China significantly underperformed,
whereas those with high ES (environmental and social) scores performed
relatively well.
Finally, the paper by Brunnermeier and Krishnamurthy (2020) con-
siders the intersection between corporate financing decisions and macro-
economics. The authors highlight some fruitful directions for future
research in these areas, including the consideration of macroeconomic
effects and related externalities in corporate bankruptcy procedures.

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

1. Financing of Corporations: Supply Side
Corporations’ cash flows have been severely hit. While the effect is tem-
porary for some firms, many firms will experience it in the longer term,
leading to financial distress. For example, some firms have business mod-
els that are incompatible with social distancing; firms in the industrial
and energy sectors will suffer from falling demand for their products;
and, financial firms may engage in more reaching for yield in a scenario
of zero short-term rates.
Under these circumstances, funding for corporations becomes crucial
to stop liquidity challenges from morphing into solvency ones. External
funding becomes central but, as existing evidence shows, high leverage
can hamper new funding. Overall, the nonfinancial corporate sector in
the United States entered this crisis carrying high levels of debt on their
balance sheets. Considering corporate bonds, bank loans (including lev-
eraged loans), and institutional leveraged loans, nonfinancial corporate
debt stood at almost $12 trillion as of 2019, a significant increase from $8
trillion in 2008. These highly leveraged balance sheets for the nonfinan-
cial firms pose at least two large threats. First, during the crisis, financing
of the business model becomes problematic when cash flows drop in a
persistent way. Second, when the recovery starts, the debt overhang
problem will pose a very big obstacle to investments.
In this issue, we have three papers that shed light on the supply side of
funding during the first stages of the crisis, examining the subject from
different perspectives. The so-called “dash for cash,” as Acharya and
Steffen (2020) argue in this issue, becomes a primary objective for sur-
vival. An important question is how did firms raise cash: through banks
(e.g., drawdowns under existing or new credit lines, term loans, and the
like), bond issuances, or equity issuances?
Banks could be a first line of defense. But were banks able to provide
liquidity arising from a large economy-wide shock? Suffice it to say that
March–April 2020 can be seen as an unexpected real-life “stress test” on
many banks. Li, Strahan, and Zhang (2020), in their paper “Banks as

423
Review of Corporate Finance Studies / v 9 n 3 2020

Lenders of First Resort: Evidence from the COVID-19 Crisis,” show that
firms in the United States immediately turned to their banks for the
provision of liquidity as the crisis started. Firms drew funds from preex-
isting lines of credit at an unpresented scale, with large banks providing
most of the required funding. Interestingly, location mattered: Li,
Strahan, and Zhang (2020) find much larger lending increases in banks
located in communities that suffered the most from the COVID-19 out-
break. An important point to note is that banks entered this crisis in a
significantly healthier position compared to the 2008–2009 financial cri-

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

sis. The various policy interventions since the financial crisis have led to
safer bank balance sheets and allowed banks to meet corporations’ fund-
ing needs when the COVID-19 pandemic hit.
Which firms felt the most need to raise external financing? One impor-
tant answer comes from the firms’ ratings: firms on the cusp of being
downgraded to non-investment status are likely to behave most aggres-
sively to buttress their cash position and reduce the likelihood of becom-
ing fallen angels. The background is important here, as the volume of
BBB-rated debt has more than quadrupled since the last financial crisis.
Indeed, ratings risk induced by the COVID-19 shock is important not
only for nonfinancial firms but also for regulated financial institutions
that may have to engage in fire sales of bonds that lose their investment-
grade status. Acharya and Steffen (2020) investigate this theme in the
paper “The Risk of Being a Fallen Angel and the Corporate Dash for
Cash in the Midst of COVID.” They BBB-rated and non-investment-
grade firms increased their cash-holdings in the first quarter of 2020 sig-
nificantly more than AAA- to A-rated firms (and also unrated firms).
How did these firms reach that objective? The authors find that firms
from different rating spectrums used different funding sources: while
BBB-rated and non-investment-grade firms mostly drew down their
credit lines with banks, AAA- to A-rated firms managed to maintain
access to public capital markets and issued both bonds and equity.
Access to public capital markets is further investigated by Halling, Yu,
and Zechner (2020) in the paper “How Did COVID-19 Affect Firms’
Access to Public Capital Markets?” What were the cross-sectional differ-
ences in firms’ access to external capital markets and which firm charac-
teristics drove these differences? The paper starts with an important
result: corporate bond issues increased substantially since the onset of
the pandemic crisis both for bonds rated A or higher as well as for bonds
rated BBB or lower. The surprising aspect is that even companies that
were one notch above non-investment-grade issued bonds. Considering
that capital regulations impose heavy costs on financial institutions car-
rying these bonds in case a downgrade happens, this result is quite un-
expected. Another surprising result: firms chose to issue bonds with
longer maturities during the crisis, in contrast to existing evidence that

424
 The COVID-19 Pandemic Crisis and Corporate Finance

suggests the opposite happened during previous crises. Equity issues had
the opposite behavior: a marked slowing down. The results suggest that
the Federal Reserve’s corporate bond purchases had a positive impact on
firms’ ability to tap the bond market when equity issues may have been
either very costly or impossible to carry out.
The overall message from these papers is that financial markets func-
tioned smoothly during the early part of the crisis in the sense that firms
were able to raise financing quickly when the lockdowns began and cash
flow shortfalls emerged. This fact is in marked contrast to the financial

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

market disruptions we saw at the start of the 2008–2009 financial crisis
and suggests that lessons from that crisis have helped inform the policy
response to COVID-19.

2. Equity Shortfall and Zombie Lending

When the immediacy of the shock will subside, the next significant ques-
tion will emerge: what are the best policies that should be put in place to
help firms recover? Broad economic recovery and employment growth
will crucially depend on firms’ ability to get back to normal. To do so, we
should first understand how much equity has been burnt during the crisis
and, thus, how significant is the financial distress (and the scale of bank-
ruptcies) we will face. The papers discussed above show that in the short-
term firms were able to raise substantial amounts of debt. But higher
indebtedness and default risk will lead straightaway to the well-known
problem of debt overhang, resulting in lower future investments at a time
when growth will be necessary. Thus, it is important to investigate equity
erosion and its cross-sectional heterogeneity across firms and industries.
The paper “The COVID-19 Shock and Equity Shortfall: Firm-level
Evidence from Italy” by Carletti et al. (2020) is a first attempt at answer-
ing this question. The paper uses data from Italy—the first country in the
Group of Seven (G7) to be hit by the pandemic and to enact lock-
downs—to simulate equity shortfalls. Using almost 81,000 firms, the
authors find staggering impacts. Firms face an aggregate annual profit
decrease of e170 billion (approximately 10% of the 2018 GDP) after a 3-
month lockdown and, for loss-making firms, an aggregate equity erosion
of around e117 billion. The shock will force about 13,500 firms to have
negative net worth, putting at risk the employment of over 800,000 work-
ers (almost 9% of employment of the firms). This will be a bigger em-
ployment loss than that caused by the double-whammy of the 2008
financial crisis and the 2012–2013 sovereign debt crisis together. The
equity shortfall of these distressed firms will call for an equity injection
of e31 billion. The COVID-19 recession is likely to have larger effects on
small and medium-sized firms, which are the engines of employment

425
 Review of Corporate Finance Studies / v 9 n 3 2020

growth in most countries. These findings give rise to a number of ques-

tions. Will firms be able to raise equity from capital markets? If yes, how
will their ownership structure change after the entry of new shareholders?
What should be the role of governments: should they take ownership
stakes in these firms, at least the larger ones?
In the short term, governments and central banks in many parts of the
world have put into place emergency measures to inject liquidity into the
corporate sector. In the longer term, a potential danger that arises is that
firms that should have been shut down, instead, are kept alive as “zombie

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

firms” through the provision of subsidized financing. Existing literature
shows that allowing zombie firms to survive generates costs to the econ-
omy: such companies drag down productivity growth and make employ-
ment reallocation to more productive firms problematic. But how can we
determine which firms are potential zombie firms when a corporate li-
quidity crisis can easily evolve into an insolvency crisis, engulfing all
sectors? In the paper “Identifying the Real Effects of Zombie
Lending,” Schivardi, Sette, and Tabellini (2020), Schivardi et al. (2020)
argue that the literature may suffer from a serious identification problem.
Often implicitly, and sometimes explicitly, firm performance is used to
identify zombie firms. This is problematic, because a downturn in an
industry may be associated with not only the declining performance of
healthy firms but also a narrowing of the performance gap between
healthy and weak firms. There will, therefore, be a bias toward finding
that healthy firms too suffer in a sector with a high proportion of zombie
firms. In analyzing the effects of COVID-19, determining the extent to
which zombie financing is a problem will be an important issue both for
policymakers and for researchers. Indeed, Brunnermeier and
Krishnamurthy (2020) argue that if we expect a return to the pre-
COVID-19 era soon (e.g., after a vaccine is developed), there may be
less of a need for reallocation of assets across sectors or firms than in a
typical recession. In such a setting, the typical concern about providing
credit support to zombie firms in a recession may be less of a concern.

3. Firm Characteristics and Stock Prices

Another phenomenon we have witnessed as the crisis unfolded has been
massive stock price movements in the United States, with initial signifi-
cant falls and then a recovery after the announcement of the rapid inter-
vention of the Federal Reserve Board and the various programs enacted
by the federal government. One question of interest is whether firm-level
characteristics played an important role in these deep stock price
movements.

426
The COVID-19 Pandemic Crisis and Corporate Finance

In this issue, we have two papers that address this question from two
different perspectives. In the paper “Feverish Stock Price Reactions to
COVID-19,” Ramelli and Wagner (2020) find causal evidence of the
firms’ exposure to international trade for corporate value. In the initial
stages of the pandemic, internationally oriented firms, especially those
more exposed to China, underperformed. As Europe and the United
States suffered from the contagion, prices moved in a “feverish” way
as well but there were important patterns indicating cross-sectional het-
erogeneity. Both investors and analysts seem to have shifted their focus

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

to important firm characteristics: high corporate leverage and the sur-
vival chances of firms with scarce cash. This result links well with the
“dash for cash” and the related papers mentioned above. The results in
the paper show how the tail risks faced by firms, this time from a pan-
demic, were amplified in the stock markets through financial channels.
One firm-level characteristic that has attracted a lot of attention in
recent years is the extent of corporate social responsibility professed by
the firm. The pandemic, with its heavy toll on human lives, unemploy-
ment, and financial distress, should be an important acid test for firms’
professed investments in their responsibility towards society, as captured
by the Environmental, Social, and Governance (ESG) scores. Whether
these scores capture real commitment or window dressing is still a big
open question in the literature. In the face of a massive shock, such as
COVID-19, we can better understand how to interpret these scores.
The paper “Resiliency of Environmental and Social Stocks: An
Analysis of the Exogenous COVID-19 Market Crash,” by
Albuquerque et al. (2020) has this objective. The authors show that firms
in the United States with high environmental and social (ES) scores suf-
fered lower stock price declines compared to other firms. The authors
then investigate how ES policies build resiliency and look at theories of
customer and investor loyalty. Firms with high customer and investor
loyalty experienced the strongest stock price performance during the
widespread market declines caused by the pandemic. Customer loyalty
translated into higher operating profit margins of firms with high ES
scores, even at a time when the economy as a whole was suffering
through the first stages of a contraction. Looking at other performance
measures, the authors find that volatility of stock returns was lower for
firms held by investors with a preference for ES scores. Overall, the
results in the paper lend support to the view that consumer and investor
loyalty play important roles in making high ES firms more resilient dur-
ing stressful times.

427
 Review of Corporate Finance Studies / v 9 n 3 2020

4. Conclusion and Future Research Directions

The COVID-19 shock has been distinguished by both the scale of the
economic devastation it has led to and the speed with which events have
unfolded in the early stages of the crisis. In this issue, we have put to-
gether some of the best early research in corporate finance related to the
COVID-19 crisis. The papers examine which firms in the United States
raised external capital when the crisis hit and how they did so, what can
we expect in terms of equity shortfalls and potential bankruptcies in

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

Italy, the difficulty of determining which firms may be zombie firms,
and some driving factors of cross-sectional heterogeneity in stock market
returns.
The paper by Brunnermeier and Krishnamurthy (2020) in this issue
adds another dimension to the issue by considering the connections be-
tween macroeconomics and corporate finance. In corporate finance, it is
common for us to consider firms and their decisions in isolation. The
authors point out that when an adverse event affects a large number of
firms, there are important macroeconomic consequences that stem from
externalities or spillovers across firms. On the theoretical side, research
should take these externalities into account when recommending optimal
policies, as well as seriously considering dynamic models that can be
quantitatively applied to the data. On the empirical side, fruitful direc-
tions for research include the effect of government interventions on firm
financing and the effect of nontraditional and FinTech lending on small
firms.
As economies around the world begin to recover from the COVID-19
crisis, in many cases corporations will be significantly levered and will
continue to be under financial stress. It will be important both to under-
stand the extent to which debt overhang is a barrier to investment and to
devise policies, such as equity injections into firms, that may mitigate this
friction. Other open questions include the extent to which ES scores will
be driving stock returns once we return to normal times. Overall, we hope
that the topics touched on by the papers in this issue, and the many
thoughts they raise, will provide a springboard for future research into
the effects of COVID-19, and the lessons we can take away, for the next
several years.

References
Acharya, V., and S. Steffen. 2020. The risk of being a fallen angel and the corporate dash for cash in the
midst of COVID. Review of Corporate Finance Studies 9:430–71.

Albuquerque, R., Y. Koskinen, S. Yang, and C. Zhang. 2020. Resiliency of environmental and social
stocks: an analysis of the exogenous COVID-19 market crash. Review of Corporate Finance Studies
9:593–621.

Brunnermeier, M., and A. Krishnamurthy. 2020. The macroeconomics of corporate debt. Review of
Corporate Finance Studies 9:656–65.

428
The COVID-19 Pandemic Crisis and Corporate Finance

Carletti, E., T. Oliviero, M. Pagano, L. Pelizzon, and M. Subrahmanyam. 2020. The COVID-19 shock
and equity shortfall: Firm-level evidence from Italy. Review of Corporate Finance Studies 9:534–68.

Financial Times. 2020. Pandemic crisis: Global economic recovery tracker. Accessed August 1, 2020.
https://www.ft.com/content/272354f2-f970-4ae4-a8ae-848c4baf8f4a

Halling, M., J. Yu, and J. Zechner. 2020. How did COVID-19 affect firms’ access to public capital
markets? Review of Corporate Finance Studies 9:501–33.

Li, L., P. Strahan, and S. Zhang. 2020. Banks as lenders of first resort: Evidence from the COVID-19 crisis.
Review of Corporate Finance Studies 9:472–500.

Ramelli, S., and A. Wagner. 2020. Feverish stock price reactions to COVID-19. Review of Corporate

Downloaded from https://academic.oup.com/rcfs/article/9/3/421/5922826 by guest on 18 August 2022

Finance Studies 9:622–55.

Schivardi, F., E. Sette, and G. Tabellini. 2020. Identifying the real effects of zombie lending. Review of
Corporate Finance Studies 9:569–92.

World Bank. 2020. Pandemic, recession: The global economy in crisis. Report, Washington, DC. https://
www.worldbank.org/en/publication/global-economic-prospects

429