The COVID-19 insolvency gap: First-round effects of policy responses on SMEs

Julian Dörr, Simona Murmann and Georg Licht

No 21-018, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: COVID-19 placed a special role to fiscal policy in rescuing companies short of liquidity from insolvency. In the first months of the crisis, SMEs as the backbone of Europe's real economy benefited from large and mainly indiscriminate aid measures. Avoiding business failures in a whatever it takes fashion contrasts, however, with the cleansing mechanism of economic crises: a mechanism which forces unviable firms out of the market, thereby reallocating resources efficiently. By focusing on firms' pre-crisis financial standing, we estimate the extent to which the policy response induced an insolvency gap and analyze whether the gap is characterized by firms which had already struggled before the pandemic. With the policy measures being focused on smaller firms, we also examine whether this insolvency gap differs with respect to firm size. Based on credit rating and insolvency data for the near universe of actively rated German firms, our results suggest that the policy reponse to COVID-19 has triggered a backlog of insolvencies in Germany that is particularly pronounced among financially weak, small firms, having potential long term implications on economic recovery.

Keywords: COVID-19 policy response; Corporate bankruptcy; Cleansing e ect; SMEs (search for similar items in EconPapers)
JEL-codes: C83 G33 H12 O38 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-eec, nep-ent, nep-rmg and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:21018

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