Small Firms amidst COVID-19: Financial Constraints and Role of Government Support

Abstract

The coronavirus epidemic has severely affected the small and medium enterprises (SMEs), which are more financially constrained compared with large companies. Waking up to this challenge, various countries employed short-run and long-run policies to support SMEs. Using rich firm-level data from 13 countries, this paper explores the impact of the pandemic-led crisis on cash-strapped SMEs and the role that governments played in offsetting the losses in the sector. Our results unambiguously suggest that financially constrained firms are more likely to shut down their operations. The results are robust to concerns arising from endogeneity of finance constraints and also to alternative measures of firm closure and specifications. We also find that government support programmes are more inclusive as they target mostly financially constrained firms. Our final set of analysis reveals that financially constrained firms are more likely to sack workers; and there is clear evidence of gender bias in layoffs.