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Do firms gamble for resurrection from COVID-19?

Author

Listed:
  • Bai, Min
  • Zhang, Yuqi
  • Yu, Chia-Feng (Jeffrey)

Abstract

This study investigates how firms cope with downside risk induced by COVID-19. Employing an entropy-balancing-matching and difference-in-differences analysis based on the COVID-19 outbreak in China, we find a significant increase in leverage and risk-taking for firms strongly impacted by the pandemic. The effect is concentrated on moderately financially constrained and less politically connected firms. These findings suggest that firms with fewer funding sources gamble for resurrection and shift risk to debtholders when struck by COVID-19.

Suggested Citation

  • Bai, Min & Zhang, Yuqi & Yu, Chia-Feng (Jeffrey), 2024. "Do firms gamble for resurrection from COVID-19?," Economics Letters, Elsevier, vol. 241(C).
    • Handle: RePEc:eee:ecolet:v:241:y:2024:i:c:s0165176524003197
    DOI: 10.1016/j.econlet.2024.111835
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    References listed on IDEAS

    as
    1. Assaf Eisdorfer, 2008. "Empirical Evidence of Risk Shifting in Financially Distressed Firms," Journal of Finance, American Finance Association, vol. 63(2), pages 609-637, April.
    2. Kevin Aretz & Shantanu Banerjee & Oksana Pryshchepa, 2019. "In the Path of the Storm: Does Distress Risk Cause Industrial Firms to Risk-Shift?," Review of Finance, European Finance Association, vol. 23(6), pages 1115-1154.
    3. Kirti, Divya, 2024. "When gambling for resurrection is too risky," Journal of Banking & Finance, Elsevier, vol. 162(C).
    4. Faccio, Mara & Marchica, Maria-Teresa & Mura, Roberto, 2016. "CEO gender, corporate risk-taking, and the efficiency of capital allocation," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 193-209.
    5. Xie, Wenlan & Tian, Haowen, 2023. "The effect of the COVID-19 pandemic on corporate trade credit financing," Economics Letters, Elsevier, vol. 232(C).
    6. Zhiyao Chen & Ran Duchin, 2024. "Do Nonfinancial Firms Use Financial Assets to Take Risk?," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 13(1), pages 1-37.
    7. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    8. Tian, Haowen & Wang, Junkai, 2024. "Navigating the storm: How the COVID-19 pandemic transformed the M&A landscape," Finance Research Letters, Elsevier, vol. 59(C).
    9. Feng, Jie & Pan, Wanbin & Tao, Libin & Hu, Wenjing, 2024. "COVID-19 media sentiment and IPO underpricing," Economics Letters, Elsevier, vol. 234(C).
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    Cited by:

    1. Ge, Shilong & Luo, Xiaodan & Li, Yuangang & Zheng, Lanxing, 2024. "The impact of green credit policy on total factor productivity of enterprises," International Review of Economics & Finance, Elsevier, vol. 95(C).

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    More about this item

    Keywords

    COVID-19 pandemic; Downside risk; Risk-Shifting;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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