The Market Value of Public Interventions in the Corporate Sector: Evidence from Covid19

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See all articles by Francois Koulischer

Francois Koulischer

Luxembourg School of Finance

Diane Pierret

Universite du Luxembourg - Luxembourg School of Finance

Roberto Steri

University of Luxembourg

Date Written: November 21, 2020

Abstract

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.

Suggested Citation

Koulischer, Francois and Pierret, Diane and Steri, Roberto, The Market Value of Public Interventions in the Corporate Sector: Evidence from Covid19 (November 21, 2020). Available at SSRN: https://ssrn.com/abstract=

Francois Koulischer

Luxembourg School of Finance ( email )

6, rue Richard Coudenhove-Kalergi
Luxembourg, L-1359
Luxembourg

HOME PAGE: http://https://sites.google.com/site/francoiskoulischer/

Diane Pierret (Contact Author)

Universite du Luxembourg - Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511
Luxembourg

Roberto Steri

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi
Luxembourg
Luxembourg

HOME PAGE: http://https://sites.google.com/site/robertosteripersonalpage/

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