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Distribution of COVID-19 government support and its consequences for firm liquidity and solvency

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  • Lalinsky, Tibor
  • Pál, Rozália

Abstract

We utilize several unique firm-level datasets in order to assess the efficiency and effectiveness of the government support aiming to curb the economic consequences of the coronavirus pandemic. The results, drawing on the experience of a small open European country, suggest the distributed COVID-19 subsidies save non-negligible number of jobs and sustain economic activity during the first wave of the pandemic. General distribution rules designed on the fly may bring close to optimal results in terms of the support allocation, as relatively more productive, privately owned, foreign-demand oriented firms are prioritized and firms with a high environmental footprint or zombie firms record a relatively lower chance of obtaining government funding. By assuming constant cost elasticities to sales, we show that the pandemic deteriorates strongly firm profits and increases significantly the share of illiquid and insolvent firms. Government wage subsidies somewhat mitigate firm losses and have statistically significant effect, but relatively mild compared to the size of the economic shock. Our estimates also confirm that larger firms, receiving smaller relative size of the support, have more space to cover their additional liquidity needs by increasing trade liabilities or liabilities to affiliated entities, while SMEs face higher risk of insolvencies.

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  • Lalinsky, Tibor & Pál, Rozália, 2022. "Distribution of COVID-19 government support and its consequences for firm liquidity and solvency," Structural Change and Economic Dynamics, Elsevier, vol. 61(C), pages 305-335.
    • Handle: RePEc:eee:streco:v:61:y:2022:i:c:p:305-335
    DOI: 10.1016/j.strueco.2022.03.008
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    Cited by:

    1. Lalinsky, Tibor & Anyfantaki, Sofia & Benkovskis, Konstantins & Bergeaud, Antonin & Bun, Maurice & Bunel, Simon & Colciago, Andrea & De Mulder, Jan & Lopez, Beatriz Gonzalez & Jarvis, Valerie & Krasno, 2024. "The impact of the COVID-19 pandemic and policy support on productivity," Occasional Paper Series 341, European Central Bank.
    2. Lalinsky, Tibor & Meriküll, Jaanika & Lopez-Garcia, Paloma, 2024. "Productivity-enhancing reallocation during the Covid-19 pandemic," Working Paper Series 2947, European Central Bank.
    3. Telegdy, Álmos, 2024. "The effects of enterprise relief grants during COVID-19," Economics Letters, Elsevier, vol. 234(C).
    4. Bighelli, Tommaso & Lalinsky, Tibor & Vanhala, Juuso, 2023. "Cross-country evidence on the allocation of COVID-19 government subsidies and consequences for productivity," Journal of the Japanese and International Economies, Elsevier, vol. 68(C).
    5. Wellalage, Nirosha & Reddy, Krishna & Wallace, Damien, 2023. "Environmental performance and the role of government support: Evidence from the recent COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 58(PA).
    6. Leng, Aolin & Sun, Yanbing, 2024. "The impact mechanism and breakthrough path of COVID-19 on enterprise financial distress: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 16-31.

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