Financing Firms in Hibernation during the COVID-19 Pandemic

Tatiana Didier (), Federico Huneeus, Mauricio Larrain and Sergio Schmukler

No 2233, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: The coronavirus (COVID-19) pandemic has halted economic activity worldwide, hurting firms and pushing them toward bankruptcy. This paper provides a unified framework to organize the policy debate related to firm financing during the downturn, centered along four main points. First, the economic crisis triggered by the spread of the virus is radically different from past crises, with important consequences for optimal policy responses. Second, to avoid inefficient bankruptcies and long-term detrimental effects, it is important to preserve firms' relationships with key stakeholders, like workers, suppliers, customers, and creditors. Third, firms can benefit from "hibernating," using the minimum bare cash necessary to withstand the pandemic, while using credit to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock such as this pandemic. Financial sector policies can help increase the provision of credit, while posing difficult choices and trade-offs.

Keywords: Cash crush; Coronavirus; Credit risk; Financial policies; Firm relationships (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G33 G38 I18 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020-05
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Financing firms in hibernation during the COVID-19 pandemic (2021)
Working Paper: Financing Firms in Hibernation during the COVID-19 Pandemic (2020)
Working Paper: Financing Firms in Hibernation during the COVID-19 Pandemic (2020)
Working Paper: Financing Firms in Hibernation during the COVID-19 Pandemic (2020)
Working Paper: Financing Firms in Hibernation During the COVID-19 Pandemic (2020)
Working Paper: Financing Firms in Hibernation During the COVID-19 Pandemic (2020)
Working Paper: Financing Firms in Hibernation during the COVID-19 Pandemic (2020)
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