Estimating the COVID-19 Cash Crunch: Global Evidence and Policy

36 Pages Posted: 27 Mar 2020 Last revised: 13 Apr 2020

See all articles by Antonio De Vito

Antonio De Vito

IE Business School - IE University

Juan-Pedro Gomez

IE Business School - IE University

Date Written: April 8, 2020

Abstract

In this paper, we investigate how the COVID-19 health crisis could affect the liquidity of listed firms across 26 countries. We stress-test three liquidity ratios for each firm with full and partial operating flexibility in two simulated distress scenarios corresponding to drops in sales of 50% and 75%, respectively. In the most adverse scenario, the average firm with partial operating flexibility would exhaust its cash holdings in about two years. At that point, its current liabilities would increase, on average, by eight times, suggesting that the average firm would have to resort to the debt market to prevent a liquidity crunch. Moreover, about 1/10th of all sample firms would become illiquid within six months. Finally, we study two different fiscal policies, tax deferrals and bridge loans, that governments could implement to mitigate the liquidity risk. Our analysis suggests bridge loans are more cost-effective to prevent a massive cash crunch.

Keywords: COVID-19, cash crunch, liquidity risk, business taxes, fiscal policies, bridge loans

JEL Classification: G32; G33; H25; H32; M41

Suggested Citation

De Vito, Antonio and Gomez, Juan-Pedro, Estimating the COVID-19 Cash Crunch: Global Evidence and Policy (April 8, 2020). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3560612 or http://dx.doi.org/10.2139/ssrn.3560612

Antonio De Vito (Contact Author)

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

Juan-Pedro Gomez

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain
+34 917821326 (Phone)

HOME PAGE: http://www.ie.edu/faculty/juan-pedro-gomez/

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