The COVID-19 Insolvency Gap: First-Round Effects of Policy Responses on SMEs

47 Pages Posted: 18 Mar 2021

See all articles by Julian Oliver Dörr

Julian Oliver Dörr

ZEW – Leibniz Centre for European Economic Research

Simona Murmann

ZEW – Leibniz Centre for European Economic Research

Georg Licht

ZEW - Leibniz Centre for European Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2021

Abstract

COVID-19 placed a special role to fiscal policy in rescuing companies short of liquidity from insolvency. In the first months of the crisis, SMEs as the backbone of Europe’s real economy benefited from large and mainly indiscriminate aid measures. Avoiding business failures in a whatever it takes fashion contrasts, however, with the cleansing mechanism of economic crises: a mechanism which forces unviable firms out of the market, thereby reallocating resources efficiently. By focusing on firms’ pre-crisis financial standing, we estimate the extent to which the policy response induced an insolvency gap and analyze whether the gap is characterized by firms which had already struggled before the pandemic. With the policy measures being focused on smaller firms, we also examine whether this insolvency gap differs with respect to firm size. Based on credit rating and insolvency data for the near universe of actively rated German firms, our results suggest that the policy response to COVID-19 has triggered a backlog of insolvencies in Germany that is particularly pronounced among financially weak, small firms, having potential long term implications on economic recovery.

Keywords: COVID-19 policy response, Corporate bankruptcy, Cleansing effect, SMEs

JEL Classification: C83, G33, H12, O38

Suggested Citation

Dörr, Julian Oliver and Murmann, Simona and Licht, Georg, The COVID-19 Insolvency Gap: First-Round Effects of Policy Responses on SMEs (January 1, 2021). ZEW - Centre for European Economic Research Discussion Paper No. 21-018, Available at SSRN: https://ssrn.com/abstract=3805600 or http://dx.doi.org/10.2139/ssrn.3805600

Julian Oliver Dörr (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de/en/team/jdo

Simona Murmann

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Georg Licht

ZEW - Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

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