The Role of External Capital in Funding Cash Flow Shocks: Evidence From the COVID-19 Pandemic

40 Pages Posted: 2 Nov 2020 Last revised: 7 Mar 2022

See all articles by Edith S. Hotchkiss

Edith S. Hotchkiss

Boston College - Carroll School of Management

Greg Nini

Drexel University - Department of Finance

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: March 3, 2021

Abstract

Using a novel measure of firms’ expected revenue shortfall at the onset of the pandemic, we study the cross sectional differences in how firms fund cash flow shortfalls. We document a U-shaped pattern, where external capital flows to firms with the largest positive and negative expected cash flow shocks. Firms traditionally considered “financially constrained” raise more - not less - capital (relative to assets), on the margin by issuing equity, while unconstrained firms rely on debt markets. Our findings suggest that external equity plays a crucial role as a financing source for smaller, younger, and otherwise riskier firms in times of stress.

Keywords: COVID-19, external financing, financial constraints, capital raising, corporate debt, zombies

JEL Classification: G01, G32

Suggested Citation

Hotchkiss, Edith S. and Nini, Gregory and Smith, David Carl, The Role of External Capital in Funding Cash Flow Shocks: Evidence From the COVID-19 Pandemic (March 3, 2021). Available at SSRN: https://ssrn.com/abstract=3723001 or http://dx.doi.org/10.2139/ssrn.3723001

Edith S. Hotchkiss

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Gregory Nini

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

David Carl Smith (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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