COVID-19 and Firm Response: Evidence from China
Print Article:
This paper explores the effects of the coronavirus disease (COVID-19) pandemic on firm response. Using a novel COVID-19 sentiment index, our estimation shows that the pandemic significantly reduced the overseas revenue and profits of firms listed on the Chinese A-share market. Moreover, we observe that an increase in loans, and a drop in debt financing cost and trade credit, were prominent during the pandemic. We contend that reduced cash flows, which damaged firm operations; government support, which provided more financing channels; and increased default risks, which placed barriers on trade credit, are the plausible mechanisms through which the COVID-19 pandemic affects firm performance. Profit contraction was more pronounced for firms with a lower ratio of domestic content in exports and state-owned enterprises, while external financing was easier for firms subject to stringent financial constraints despite their lowered trade credit.
