DP14831 The COVID-19 Shock and Equity Shortfall: Firm-level Evidence from Italy

Author(s): Elena Carletti, Tommaso Oliviero, Marco Pagano, Loriana Pelizzon, Marti G. Subrahmanyam
Publication Date: May 2020
Date Revised: June 2020
Keyword(s): COVID-19, Distress, equity, losses, Pandemics, Recapitalization
JEL(s): G01, G32, G33
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14831

This paper estimates the drop in profits and the equity shortfall triggered by the COVID-19 shock and the subsequent lockdown, using a representative sample of 80,972 Italian firms. We find that a 3-month lockdown entails an aggregate yearly drop in profits of 170 billion euros, with an implied equity erosion of 117 billion euros for the whole sample, and 31 billion euros for firms that became distressed, i.e., ended up with negative book value after the shock. As a consequence of these losses, about 17% of the sample firms, whose employees account for 8.8% of total employment in the sample (about 800 thousand employees), become distressed. Small and medium-sized enterprises (SMEs) are affected disproportionately, with 18.1% of small firms, and 14.3% of medium-sized ones becoming distressed, against 6.4% of large firms. The equity shortfall and the extent of distress are concentrated in the Manufacturing and Wholesale Trading sectors and in the North of Italy. Since many firms predicted to become distressed due to the shock had fragile balance sheets even prior to the COVID-19 shock, restoring their equity to their pre-crisis levels may not suffice to ensure their long-term solvency.