Covid-19, corporate survival and public policy: The role of accounting information and regulation in the wake of a systemic crisis

Abstract

The economic crisis triggered by the Covid-19 pandemic prompted governments to issue several relief mechanisms to hold up companies and workers. This study analyzes how accounting information and regulation can support policymakers in the wake of a systemic crisis. Based on an accounting-based framework and readily available data from financial statements, it forecasts the impact of the crisis in terms of losses, equity depletion, and corporate defaults, absent government intervention. Next, it quantifies the costs and effects of five relief mechanisms in alleviating the risk of generalized corporate bankruptcies. The effects of the health pandemic and relief mechanisms on profitability and equity shortfalls are estimated for a sample of 586,076 privately held Italian firms. The findings indicate that the number of companies facing bankruptcy risk would increase from 65,463 (11% of the population) in 2019 to 153,681 (26%) in 2020, absent any government intervention. Altogether, these firms employ 1.4 million employees and have a total exposure to the financial industry equal to €68 billion in loans. Next, we assess the effects of relief mechanisms introduced by the Italian government to support corporations, whose aggregate costs reach €49.33 billion in 2020, and find that the interventions ‘rescue’ about 43,000 firms otherwise in default. Finally, the study adds to the debate on the role of accounting regulation in the wake of a systemic crisis by (a) discussing the effects of temporary changes to accounting rules on the informativeness and transparency of financial statements, and (b) suggesting alternative ways to modify accounting rules to safeguard corporate survival without compromising the informativeness of financial statements once the crisis reaches a halt.