Discussion paper

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

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, with an implied
equity erosion of €117 billion for the whole sample, and €31 billion 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.


Carletti, E, T Oliviero, M Pagano, L Pelizzon and M Subrahmanyam (2020), ‘DP14831 The COVID-19 Shock and Equity Shortfall: Firm-level Evidence from Italy‘, CEPR Discussion Paper No. 14831. CEPR Press, Paris & London. https://cepr.org/publications/dp14831