Small firms amidst COVID‐19: Financial constraints and role of government support

Abstract

The coronavirus disease 2019 has severely affected the financially constrained small and medium enterprises (SMEs).In response, various countries employed several policies to support SMEs. Using rich firm-level data from 34 countries, we study the impact of the pandemic-led crisis on cash-strapped SMEs and the role of governments in offsetting losses. Our results suggest that (i) government support programmes target mostly financially constrained firms; (ii) firms adjustments to the pandemic are associated with the likelihood of government support; (iii) financially constrained firms are more likely to lay off workers; and (iv) financially constrained firms layoff more male employees than female employees.

Covid-19 pandemic and firm performance: evidence on industry differentials and impacting channels

“…The study shows that while the period before the lockdown causes a decrease in market movements, the impact is reserved during the lockdown. Meanwhile, only a few studies take a closer, micro-level examination of the variations in the profitability of firms under the Covid-19 crisis context, including Candra and Rekha (2020), Golubeva (2021), Fu and Shen (2020), Chundakkadan et al (2022), Fahlenbrach et al (2021), Shafi et al (2020), Shen et al (2020), Song et al (2021) and Xiong et al (2021).…”

“…Fu and Shen (2020), investigating the performance of energy firms in different areas in China, reveal that firms and high-affected regions witness a severe deterioration in business performance. Chundakkadan et al (2022), covering 3,174 firms in 13 countries in research, find that with the hit of Covid-19, highly financially constrained firms face a higher probability of closing their businesses and exiting the market. Relaxing firms' financial stress could decrease that probability down by 22%.…”

“…Meanwhile, only a few studies take a closer, micro-level examination of the variations in the profitability of firms under the Covid-19 crisis context, including Candra and Rekha (2020), Golubeva (2021), Fu and Shen (2020), Chundakkadan et al . (2022), Fahlenbrach et al .…”

“…In detail, financially strapped firms which face limited sources of finance are believed to be trapped into making less profitable business decisions as well as be refrained from further growth (Beck and Demirguc-Kunt, 2006; Aghion et al ., 2007; Musso and Schiavo, 2008; Singhania and Mehta, 2017; Altaf and Ahmad, 2019), even ultimately exit the market (Musso and Schiavo, 2008; Chundakkadan et al ., 2022). These anticipatable consequences urge firms to look for solutions internally (Altaf and Ahmad, 2019; Singhania and Mehta, 2017) and externally (Beck and Demirguc-Kunt, 2006; Aghion et al ., 2007; Musso and Schiavo, 2008) to be in a sufficiently financed state and preserve their business performance.…”

Did government support delay bankruptcy during the pandemic?

“…Cirera et al (2021) find evidence of policy mistargeting as smaller firms were less likely to receive support from governments while developing countries gave less support due to fiscal constraints. Although some studies show that government support programmes targeted mostly financially constrained firms (Chundakkadan et al, 2022), they seem to suggest that policy support is limited for vulnerable firms and countries. Other studies find evidence that government support was insufficient to maintain financial health (Fasano et al, 2022) and that many productive firms did not receive government support at all (Kozeniauskas et al, 2022).…”