Financial Distress, COVID-19 and Listed SMEs: A Multi-methodology Approach

Abstract

The multiple phase-wise lockdowns starting 24 March 2020, imposed to control COVID-19 spread in India, put a shrieking halt to industrial activities. Such nationwide lockdowns further exacerbated the financial distress, a long-standing challenge for small and medium-sized enterprises (SMEs). In this study, we examine how corporate governance forms like promoters’ ownership, financial performance and market competition affect the distress of listed SMEs, both in the pre-COVID-19 era and during the COVID-19 period. To do so, the study adopts a two-fold sampling and multi-methodology approach. First, by applying panel data analysis on the first sample of 80 listed SMEs for the financial year (FY), FY 2017–2018 to FY 2019–2020, pre-COVID-19 period results are obtained. Second, by applying cross-sectional analysis on the second sample of 155 listed SMEs for FY 2020–2021, results during the COVID-19 period are obtained. Main results indicate that previous years’ distress determines distress in the current year in the pre-COVID-19 era. In addition, promoters’ ownership and return on equity reduce the possibility of distress, while current period competition is insignificant. Conversely, COVID-19 can exacerbate distress and render promoters’ ownership insignificant. Furthermore, the COVID-19 period is characterized by reduced asset utilization. Therefore, any marginal increase in return on assets reduces distress. Interestingly, MC becomes an active determinant of distress during the COVID-19 pandemic. In summary, episodes like COVID-19 can modify the impact behaviour of the aforementioned determinants of distress. Notably, the results highlight the fragility of internal governance forms like ownership effects, while establishing the dominance of external factors like competition during the COVID-19 period.