Sizing up Corporate Restructuring in the COVID Crisis
In the wake of the COVID-19 pandemic, the financial and legal system will need to deal with a surge of financial distress in the business sector. Some firms will be able to survive, while others will face bankruptcy and thus need to be liquidated or reorganized. Many surviving firms will need to be downsized or acquired. In normal times, this triage is supported by the court system, banks, and financial markets. The goal of this paper is to size up the coming surge of financial distress, list the challenges it presents in the current environment, and analyze potential policy solutions. Overall, our analysis suggests that the two key issues will be court congestion and excess liquidation and failure of small firms.
This paper was prepared for the Brookings Papers on Economic Activity. We thank Usman Omer and Jiaheng Yu for great research assistance, and Sam Antill, Jan Eberly, Sam Hanson, Edie Hotchkiss Adi Sunderam and Eric Zwick for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
All authors received an honorarium from Brookings for preparing this paper. I have nothing else to disclose.