The COVID-19 Impact on Corporate Leverage and Financial Fragility

We study the impact of COVID-19 recession on capital structure publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from pre-shock mean 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, whose businesses were most vulnerable social distancing did not reduce leverage. rationalize our evidence through a structural model firm value that shows lower expected growth rate and higher volatility cash flows following reduced optimal levels corporate Model-implied indicates which de-lever became over-leveraged. find default probability deteriorates in large, over-leveraged those stressed pre-COVID. Additional stress tests predict these will be less than one standard deviation away if decline 20 percent.