SME Failures Under Large Liquidity Shocks: An Application to the COVID-19 Crisis

Pierre-Olivier Gourinchas, Şebnem Kalemli-Özcan, Veronika Penciakova and Nicholas Sander

Staff Working Papers from Bank of Canada

Abstract: We study the effects of financial frictions on firm exit when firms face large liquidity shocks. We develop a simple model of firm cost-minimization that introduces a financial friction that limits firms’ borrowing capacity to smooth temporary shocks to liquidity. In this framework, firm exit arises from the interaction between this financial friction and fluctuations in cash flow due to aggregate and sectoral changes in demand conditions, as well as more traditional shocks to productivity. To evaluate the implications of our model, we use firm-level data on small and medium-sized enterprises (SMEs) in 11 European countries. We confirm that our framework is consistent with official failure rates in 2017–2019, a period characterized by standard business cycle fluctuations in demand. To capture a large liquidity shock, we apply our framework to the COVID-19 crisis. We find that, in the absence of government support, SME failure rates would have increased by 6.01 percentage points, putting 3.1 percent of employment at risk. Our results are consistent with the premise that financial frictions lead to inefficient exit as, without government support, the firms failing due to COVID-19 have similar productivity and past growth to firms that survive the COVID-19 crisis.

Keywords: Firm dynamics; International topics; Coronavirus disease (COVID-19) (search for similar items in EconPapers)
JEL-codes: D22 E65 H81 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2023-06
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-eff, nep-ent, nep-fdg, nep-mfd and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2023/06/swp2023-32.pdf Full text (application/pdf)

Related works:
Working Paper: SME Failures Under Large Liquidity Shocks: An Application to the COVID-19 Crisis (2022)
Working Paper: SME Failures Under Large Liquidity Shocks: An Application to the COVID-19 Crisis (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-32

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().