European firms,Panic Borrowing and Credit Lines Drawdowns: What did we learn from the COVID-19 Shock?

We show that European firms, at the peak of the COVID-19 shock in 2020:Q2, went into a “panic borrowing” status and drew down €87bn in a very short period. We show that firms that drew down credit lines had less stringent solvency and liquidity constraints. Our study exploits the implications of the social distancing policies to corporate operations across Europe. The novel aspect of our study is that we focus on shocks unrelated to firms’ fundamentals and investigate how firms manage their cash flow risk. It is an important novel aspect of this study as a large part of the literature has studied cash flow risk management follow ingendogenous shocks due to bad management decisions. In doing so, we use COVID-19 infection data and proxies for social distancing policies in Europe as a natural laboratory. Finally, we show that European firms during the pandemic crisis increased drawdowns, on average, by 3.35 percentage points in response to an unexpected one percentage point fall in their cash flows, butonly when firms’earnings are negative.This result is driven by the lockdown policies introduced in Europe.