The COVID-19 Impact on Corporate Leverage and Financial Fragility

51 Pages Posted: 17 Feb 2022

See all articles by Sharjil Haque

Sharjil Haque

Board of Governors of the Federal Reserve System

Richard Varghese

International Monetary Fund (IMF)

Date Written: November 1, 2021


We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.

Keywords: COVID-19, Corporate Debt, Optimal Capital Structure, Rollover Risk, Distance-To-Default, Default Risk, Stress Tests, over-leveraged firm, default probability, impact of the COVID-19 recession, model-implied optimal leverage, business risk, debt maturity, Asset valuation, Business enterprises, Currencies, Credit risk, Global, asset volatility

JEL Classification: G00, G10, G30, G32, G33, I12, G15, G20, E42

Suggested Citation

Haque, Sharjil and Varghese, Richard, The COVID-19 Impact on Corporate Leverage and Financial Fragility (November 1, 2021). IMF Working Paper No. 2021/265, Available at SSRN:

Sharjil Haque (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Richard Varghese

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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