COVID-19 Dynamics and Financing of Cash Flow Shortages: Evidence from Firm-Level Survey

Abstract

Research Question: We seek answers to two pertinent questions: (1) Do COVID-19 dynamics establish new determinants of financing structure following cash flow shortages, if yes, (2) To what extent do COVID-19 dynamics affect firms’ financing sources? Motivation: Firms experiencing cash flow shortages due to the COVID-19 crisis respond either operationally, by making changes to the production process and production lines, or in management and strategy, by making changes to employee job engagement and new technological approaches to delivering goods and services, or financially, through the choice of equity and debt capital and filings of bankruptcy. Idea: This study investigates the effects of Covid-19 dynamics (i.e., productivity shocks, credit agreements, closure strategy, employee welfare, online activity adoption, and economic policy response) on the financing structure of establishments. Data: A unique cross-country firm-level survey data covering 28 countries was obtained from the World Bank Enterprise Survey (WBES). Method/Tools: The study uses the logit regression estimation technique. Findings: Logit regression findings reveal that firms that temporarily close business operations due to COVID-19 took fewer bank loans to finance cash flow shortages. The adoption of online sales and delivery services has significant negative effects on account payables whereas it has positive effects on bank loans. Firms adopting remote work arrangements increase their bank loans. Sales on credit and purchases on credit significantly increase the use of accounts payables. Firms actively involved in the production conversion process used more bank loans and less equity finance. Also, firms that engage temporary workers use more equity finance and accounts payables and fewer bank loans. However, we do not find evidence that firms where workers quit voluntarily change their capital structure. Overall, we find evidence of the “spare tire” effect of the capital market as equity finance (i.e., retained earnings) dominates the financing structure across sampled firms in health crisis periods. Contributions: Our study is among the first to provide new determinants of capital structure following a health crisis.