{
  "title": "The COVID-19 Impact on Corporate Leverage and Financial Fragility",
  "publication": "IMF Working Papers, November 5, 2021",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2021/11/05/the-covid-19-impact-on-corporate-leverage-and-financial-fragility-504356",
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  "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.",
  "sections": [
    {
      "heading": "Main findings",
      "content": "- Leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent.\n- Debt maturity increased moderately.\n- The de-leveraging effect is stronger for firms exposed to significant rollover risk.\n- Firms whose businesses were most vulnerable to social distancing did not reduce leverage.\n- Firms which did not de-lever became over-leveraged according to model-implied optimal leverage."
    },
    {
      "heading": "Structural model and interpretation",
      "content": "- A structural model of firm value is used to rationalize the empirical evidence.\n- The model shows that lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage.\n- Model-implied optimal leverage identifies firms that are over-leveraged when observed leverage did not fall."
    },
    {
      "heading": "Default risk, heterogeneity, and stress tests",
      "content": "- Default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID.\n- 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."
    },
    {
      "heading": "Key statistics and descriptors",
      "content": "- Pages: 51\n- Issue: 265\n- Series: Working Paper No. 2021/265\n- DOI: https://doi.org/10.5089/9781589064126.001\n- Subjects: Asset and liability management; Asset valuation; Business enterprises; COVID-19; Credit risk; Currencies; Economic sectors; Financial regulation and supervision; Health; Money\n- 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\n\nSource: The COVID-19 Impact on Corporate Leverage and Financial Fragility, IMF Working Papers (Working Paper No. 2021/265).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2021/11/05/the-covid-19-impact-on-corporate-leverage-and-financial-fragility-504356"
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    "Authors: Sharjil M. Haque, Richard Varghese",
    "Published: November 5, 2021",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781589064126.001",
    "Leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent.",
    "Debt maturity increased moderately.",
    "The de-leveraging effect is stronger for firms exposed to significant rollover risk.",
    "Firms whose businesses were most vulnerable to social distancing did not reduce leverage.",
    "Firms which did not de-lever became over-leveraged according to model-implied optimal leverage.",
    "A structural model of firm value is used to rationalize the empirical evidence.",
    "The model shows that lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage.",
    "Model-implied optimal leverage identifies firms that are over-leveraged when observed leverage did not fall.",
    "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.",
    "Pages: 51",
    "Issue: 265",
    "Series: Working Paper No. 2021/265",
    "DOI: https://doi.org/10.5089/9781589064126.001",
    "Subjects: 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",
    "**Working Paper**"
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