## The COVID-19 Impact on Corporate Leverage and Financial Fragility

_IMF Working Papers, November 5, 2021_

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**Canonical URL:** [The COVID-19 Impact on Corporate Leverage and Financial Fragility](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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## Bibliographic details
- Authors: Sharjil M. Haque, Richard Varghese
- Published: November 5, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781589064126.001

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### Main findings
- 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.

### Structural model and interpretation
- 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 risk, heterogeneity, and stress tests
- 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.

### Key statistics and descriptors
- 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

*Source: The COVID-19 Impact on Corporate Leverage and Financial Fragility, IMF Working Papers (Working Paper No. 2021/265).*

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_Source: https://www.imf.org/en/publications/wp/issues/2021/11/05/the-covid-19-impact-on-corporate-leverage-and-financial-fragility-504356_