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Financing Firms in Hibernation during the COVID-19 Pandemic

Tatiana Didier (), Federico Huneeus (), Mauricio Larrain and Sergio Schmukler ()
Additional contact information
Mauricio Larrain: Financial Market Commission & PUC Chile

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

Abstract: The coronavirus (COVID-19) pandemic halted economic activity worldwide, hurting firms and pushing many of them toward bankruptcy. This paper discusses four central issues that have emerged in the academic and policy debates related to firm financing during the downturn. First, the economic crisis triggered by the pandemic is radically different from past crises, with important consequences for optimal policy responses. Second, it is important to preserve firms’ relationships with key stakeholders (like workers, suppliers, customers, and creditors) to avoid inefficient bankruptcies and long-term detrimental economic effects. Third, firms can benefit from "hibernation," incurring the minimum bare expenses necessary to withstand the pandemic, while using credit if needed to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock like a 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: 31 pages
Date: 2020-05, Revised 2020-09
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https://cowles.yale.edu/sites/default/files/files/pub/d22/d2233-r.pdf (application/pdf)

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