COVID-19: Guaranteed Loans and Zombie Firms

52 Pages Posted: 8 Jun 2020 Last revised: 3 Sep 2020

See all articles by Benedikt Zoller-Rydzek

Benedikt Zoller-Rydzek

ZHAW School of Management and Law

Florian Keller

ZHAW School of Management and Law

Date Written: June 5, 2020

Abstract

Based on the ZHAW Managers Survey (7-13 April 2020) we evaluate firm reactions towards the COVID-19 crisis. We find that the Swiss economic lockdown measures successfully froze the economy, i.e., firms show very little pro-active reactions towards the crisis, but drastically decrease their business activities. The firms in the survey report that the decline in foreign demand is the single most important reasons for their deteriorating business situation. The only significant pro-active reactions to mitigate the crisis are increased digitalization efforts. These efforts are expected to have a long-lasting impact on firms' performance due to a selection effect, i.e., firms with more positive experience of digitialization will maintain their higher levels of digitalization even after the crisis. In general we find that firms that faced a more difficult business situation before the crisis are affected more severely during the crisis. Moreover, we investigate the impact of the Swiss federal loan program (Bundeshilfe) on the business activities of Swiss firms. Specifically, we focus on the take up of firms and its interaction with the perceived business situation before and during the COVID-19 crisis. To this end, we develop a stylized theoretical model of financially constrained heterogeneous firms. We find that policy makers face a trade-off between immediate higher unemployment rates and long-term higher public spending. The former arises from a combination of a too strong economic impact of the COVID-19 lockdown and too low levels of loans provided by the government to financially distressed firms. Nevertheless, providing (too) high levels of loans to firms might create zombie firms that are going to default on their debt in the future leading to an increase in public spending.

Keywords: COVID-19, expectations, firm behaviour, financial constraints, zombie firms

JEL Classification: D22, D25, D84, G33

Suggested Citation

Zoller-Rydzek, Benedikt and Keller, Florian, COVID-19: Guaranteed Loans and Zombie Firms (June 5, 2020). Available at SSRN: https://ssrn.com/abstract=3619744 or http://dx.doi.org/10.2139/ssrn.3619744

Benedikt Zoller-Rydzek (Contact Author)

ZHAW School of Management and Law ( email )

St.-Georgen-Platz 2
Winterthur, 8401
Switzerland

HOME PAGE: http://bzoller.com

Florian Keller

ZHAW School of Management and Law ( email )

St.-Georgen-Platz 2
Winterthur, 8401
Switzerland

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