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Supporting SMEs during COVID-19: The case for targeted equity injections

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  • Díez, Federico J.
  • Duval, Romain
  • Maggi, Chiara

Abstract

We analyze the potential role of equity injections in addressing solvency risks among small and medium-sized enterprises (SMEs) after the COVID-19 crisis. Building on firm-level balance sheet projections for a sample of European economies, we simulate selected policy interventions and find that equity injections are quite effective at dampening the rise in insolvencies. Cost effectiveness requires careful targeting, however; under an illustrative scenario, leaving aside any costs arising from imperfect information and implementation, the cost of a program targeting only those SMEs worth saving is just a tenth of the cost of an untargeted approach directed to all insolvent firms. Overall, our paper provides a case for governments to rely more on targeted equity injections in responding to major shocks that trigger mass solvency risks.

Suggested Citation

  • Díez, Federico J. & Duval, Romain & Maggi, Chiara, 2022. "Supporting SMEs during COVID-19: The case for targeted equity injections," Economics Letters, Elsevier, vol. 219(C).
    • Handle: RePEc:eee:ecolet:v:219:y:2022:i:c:s0165176522002476
    DOI: 10.1016/j.econlet.2022.110717
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    References listed on IDEAS

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    1. Olivier Blanchard & Thomas Philippon & Jean Pisani-Ferry, 2020. "A new policy toolkit is needed as countries exit COVID-19 lockdowns," Policy Contributions 37232, Bruegel.
    2. Sørensen, Bent E & Kalemli-Özcan, Sebnem & Volosovych, Vadym & Villegas-Sanchez, Carolina & Yesiltas, Sevcan, 2015. "How to construct nationally representative firm level data from the ORBIS global database," CEPR Discussion Papers 10829, C.E.P.R. Discussion Papers.
    3. Arnoud Boot & Elena Carletti & Hans-Helmut Kotz & Jan Pieter Krahnen & Loriana Pelizzon & Marti Subrahmanyam, 2020. "Coronavirus and financial stability 3.0: Try equity – risk sharing for companies, large and small," Vox eBook Chapters, in: AgneÌ€s BeÌ nassy-QueÌ reÌ & Beatrice Weder di Mauro (ed.), Europe in the Time of Covid-19, edition 1, volume 1, chapter 1, pages 41-47, Centre for Economic Policy Research.
    4. Sebnem Kalemli-Ozcan & Bent Sorensen & Carolina Villegas-Sanchez & Vadym Volosovych & Sevcan Yesiltas, 2015. "How to Construct Nationally Representative Firm Level Data from the Orbis Global Database: New Facts and Aggregate Implications," NBER Working Papers 21558, National Bureau of Economic Research, Inc.
    5. Pierre-Olivier Gourinchas & Ṣebnem Kalemli-Özcan & Veronika Penciakova & Nick Sander, 2021. "Fiscal Policy in the Age of COVID: Does it ‘Get in all of the Cracks?’," NBER Working Papers 29293, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Athiphat Muthitacharoen & Athiphat Muthitacharoen, 2023. "Digital Fiscal Stimulus and SMEs: Insights from Thailand's Half and Half Program," CESifo Working Paper Series 10711, CESifo.
    2. Conceição Gomes & Filipa Campos & Cátia Malheiros & Luís Lima Santos, 2023. "Restaurants’ Solvency in Portugal during COVID-19," IJFS, MDPI, vol. 11(2), pages 1-16, April.
    3. Lily Davies & Mark Kattenberg & Benedikt Vogt, 2023. "Predicting Firm Exits with Machine Learning: Implications for Selection into COVID-19 Support and Productivity Growth," CPB Discussion Paper 444, CPB Netherlands Bureau for Economic Policy Analysis.

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    More about this item

    Keywords

    Insolvency; Bankruptcy; Small and medium-sized enterprises; SMEs; Equity injections; COVID-19;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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