COVID-19, Public Policies and Corporate Survival: 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 take immediate actions and launch a bundle of relief mechanisms to hold up companies and workers. This study analyzes the role of accounting information and regulation in supporting policy-makers in the wake of a systemic crisis in two ways: first, by clarifying how accounting information enables an in-depth appreciation of the key issues facing corporations (e.g. profitability and equity depletion, alongside liquidity), thus paving the way for the design of relief mechanisms; second, by discussing the benefits and risks of temporary changes to accounting rules perused by governments. Towards these aims, we analyze the effects of the recent health crisis on profitability and equity shortfalls for a large sample of 580,874 privately-held Italian firms; our findings suggest that the number of distressed firms - whose equity falls below legal requirements - increase from 11% in 2019 to 26% in 2020, absent any government interventions. Altogether these firms employ almost 1.4 millions of employees and have total exposure towards the financial system, net of short term assets, equal to € 65 billions. We then forecast the effects of four relief mechanisms introduced by the Italian government to mitigate losses and equity depletions and find that the interventions offer a safety net for about 24% of firms otherwise in distress. Last, the study contributes to the debate on the role of accounting information and regulation in the wake of systemic crisis by (a) highlighting and 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 avoid large corporate losses and equity depletions yet ensuring forward looking informativeness of financial statements once the crisis tapers.