The effect of COVID-19 on European firms’ leverage decisions

Abstract

The ongoing COVID-19 pandemic has shaken the global system and caused greatturmoil heavily impairing cashflows in many industries, with possible adverse implications for corporate solvency and capital structure. In this thesis, I analyze the impact of COVID-19 on European corporate balance sheets and the composition of their liabilities with a dataset made up of 1,384 firms analyzed between 2018 and 2021. I implement a set of OLS regression controlling for a well-established control set and I use a difference-in-differences approach to capture the cross-sectional difference based on the business risk prior to COVID-19. I find that firms increase leverage and the portion of long-term debt over total debt. The increase in leverage is particularly significant for firm more exposed to the business risk prior to COVID 19. Instead, firms more exposed to the business risk prior to COVID-19 do not significantly increase the portion of long-term debt in respect to firm less exposed. The results are robust to changes in the definition of leverage and business risk.

Date of Award	19 Oct 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Mário Meira (Supervisor)