The Market Value of Public Interventions in the Corporate Sector: Evidence from Covid19
64 Pages Posted:
Date Written: November 21, 2020
We link government interventions in the corporate sector to the disconnect between stock market valuations and real economic indicators observed in the Covid19 pandemic. We collect firm-level data on Covid19-related news in several European countries, which differ in public spending for immediate liquidity injections and debt guarantees to corporations. We find that interventions help firms negatively affected by the pandemic raise debt and boost market valuations, in spite of the deterioration of their revenues. Remarkably, the financial sector internalizes part of the benefits of interventions specifically targeting non-financial firms. To interpret these results, we lay out a model of corporate borrowing and public interventions. The model suggests that interventions in the corporate sector are effective to address credit market failures and simulate recovery in the long run. Lenders benefit from guarantees on corporate debt as a compensation to finance firms with severe debt overhang problems.
Keywords: corporate debt, debt overhang, guarantees, market failure, public interventions, market value.
JEL Classification: G01, G32, G38, H81.
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