Effective risk management in the shadow of COVID-19 pandemic: The evidence of Indonesian listed corporations

Abstract

The study uses COVID-19 to identify the treatment group as the difference in change of non-financial corporations (NFCs) risk management ratios over time to investigate the causal effect of the NFCs' effective risk management (ERM) practices on operational efficiency (OE). ERM was measured by solvency and liquidity ratios, while the risk management theory was developed to refine the scope of the study. The data were collected from the central bank of Indonesia to map the empirical analysis, and the difference in difference (DID) technique was used to illustrate how NFCs react to mitigate the negative impact of COVID-19 and generate OE. Specifically, a quasi-natural experiment was used to size the effect of ERM practices on corporate OE during the COVID-19 pandemic. The descriptive analysis revealed that the COVID-19 pandemic effect has been unequal across different industrial sectors. Moreover, the empirical findings showed that corporate risk management during COVID-19 is the source of structural change, which affects its existence and operational efficiency. While debt amount and age may affect corporate credit score, ERM practices led the indebted corporation to the flexibility of debt refinancing or/and restructuring, which offers them the ability to prevent bankruptcy and adapt to the changes while operating efficiently. The finding revealed evidence of the important role of long-term debt in offering protection to NFCs during the credit supply shock brought in by the COVID-19 pandemic. Furthermore, the findings show that long-term debt is negatively associated with corporate OE. This was expected given that corporations use long-term debt financing for long-term investment, while short-term debt funds the working capital. Thus, to assess the effect of debts on corporate OE, managers should consider their maturity structure, among other factors.