the economic effects of covid-19 and credit constraints .... marco brianti... · snapshot on rms’...
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The Economic Effects of COVID-19 and Credit Constraints:
Evidence from Italian Firms’ Expectations and Plans
Pierluigi Balduzzi1 Emanuele Brancati2
Fabio Schiantarelli1,3 Marco Brianti1
1Boston College
2La Sapienza University
3IZA
November 20, 2020
Sixth Annual Volatility Institute Conference at NYU Shanghai
Economic and Financial Implications of COVID-19
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COVID-19 in Italy
• Italy represents an ideal laboratory to analyze the shocks associated with
the COVID-19 outbreak
- large shocks with both common components and geographical and
sectoral heterogeneity
- mostly unexpected; first to be hit among Western countries and to
implement a national lockdown
- small and medium firms important: most likely to be affected by
financial frictions
• Timeline
- February 1: first confirmed case
- March 1: 1,694 confirmed cases and 34 official COVID-19 deaths
- March 10: lockdown measures for the whole country
- March 24: 69,176 confirmed cases and 6,820 official COVID-19 deaths
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Research questions
1. Do credit constraints amplify the effect of the shocks associated with the
outbreak on firms’ sales, orders, investment, and employment?
2. What is the effect on firms’ pricing strategies? How are those strategies
affected by financial frictions?
3. What is the relative importance of supply and demand shocks as perceived
by firms at the beginning of the crisis?
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Data sources
• Survey collected between March 24 and April 7 on Italian firms’
expectations and plans
⇒ two weeks after the lockdown
• This survey can be matched with the 2019 MET survey completed by
mid-January 2020
⇒ a month before the official case zero
• Snapshot on firms’ conditions, expectations, and plans for sales, prices,
and factor demand over the next year together with
- information on broad set of firms’ characteristics
- questions on loan applications to construct proxies for credit constraints
- for 5,000 firms we can match survey information with balance sheet data
⇒ we can analyze how expectations and plans are revised due to COVID-19
over a short window
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More on heterogeneous exposure
• Several imperfect measures available to capture the geographical intensity
of the pandemic at a provincial or regional level
⇒ infections, deaths, excessive deaths, . . .
• More informative variable is the number of deaths
i. lower measurement error than confirmed infections
ii. highest attention received by newspapers and television
⇒ allocate regional deaths according to the proportion of confirmed infections
in each province within the region
- deaths versus mortality rate
• Essential (non-essential) firms’ classification for sectoral heterogeneity
⇒ 6-digit sectoral classification from the Italian government + essentials
suppliers to these sectors
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More on heterogeneous geographical exposure in Italy
Figure: COVID-19 outbreak by province: total confirmed deaths (left panel)
and total confirmed deaths over population (right panel).
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Measure for credit constraints
• Measure on credit constraints based on survey level information on loan
applications
• Constrained firms are those that replied
i. the loan was granted but at a very unfavorable condition
ii. the loan was denied
iii. they knew the application would have been denied
• We will also explore the role of and control for
- financial variables such as liquidity and leverage
- bank relationship variables
- size and age
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Preview of the results (I)
1. Credit constraints amplify the negative effects of the COVID-19 related
shocks on sales, orders, employment, and investment
2. Credit constrained firms plan to increase prices relatively more than
unconstrained firms
3. Firms located in provinces more affected by the pandemic are more
pessimistic in terms of sales and orders, and plan to decrease factor
demand and to increase prices by more
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Preview of the results (II)
4. Firms subject to more severe restrictions (non-essential) have more
pessimistic expectations and plans for factor demand
5. While there is ample evidence of counter-cyclical markup due to credit
constraints, there is no empirical support for other reasons for
counter-cyclicality (collusive behavior, firms’ dynamics)
6. At the aggregate level there is evidence that the supply component of the
shocks is somewhat larger than the demand component as we observe fall
in expected quantities and a modest increase in planned prices
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Related literature
Empirical on COVID-19 Bartik et al. (2020); Balleer et al. (2020); Buchheim et
al. (2020); Baert et al. (2020); Coibion et al. (2020); Briscese et al. (2020);
Brancati and Brancati (2020); Brinca et al. (2020); Andersen et al. (2020);
Hassan et al. (2020); Baker et al. (2020); Caggiano et al. (2020)
Macro models on COVID-19 Baqaee and Farhi (2020a,2020b); Faria-e Castro at
al. (2020); Guerrieri et al. (2020); Woodford (2020); Eichenbaum et al.
(2020a,2020b); Basu et al. (2020); Bigio et al. (2020); Fornaro and Wolf (2020)
Financial frictions Bernanke et al. (1999); Carlstrom and Fuerst (1997); Gertler
and Gilchrist (1994); Kashyap et al. (1994); Chodorow-Reich (2014); Balduzzi et
al. (2018); Giroud and Mueller (2017)
Counter-cyclical markup Gottfries (1991); Chevalier and Scharfstein (1995);
Gilchrist et al. (2017); Kim (2020); Rotemberg and Saloner (1986); Rotemberg
and Woodford (1991,1992,1993); Chatterjee and Cooper (1989); Chatterjee et al.
(1993); Bilbiie et al. (2012)
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Descriptive evidence
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Expected sales
0.1
.2.3
.4.5
.6Fr
actio
n
<-15% -15%/-5% -5%/+5% +5%/+15% >15%Pre COVID-19 expected sales growth (12 months)
0.1
.2.3
.4.5
.6Fr
actio
n
<-15% -15%/-5% -5%/+5% +5%/+15% >15%Post COVID-19 expected sales growth (12 months)
Figure: Pre and post expected sales at 12 months
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Price plans
0.1
.2.3
.4Fr
actio
n
-50 0 50Pre COVID-19 expected price growth (12 months)
0.1
.2.3
.4Fr
actio
n
-50 0 50Post COVID-19 expected price growth (12 months)
Figure: Pre and post planned prices1
1Unweighted means from 1.1% to 7% and sales weighted means from 2.48% to 2.61%
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Joint distribution of expected sales and prices
• There is a generalized expected decrease in sales (72.8%)
• The price response is heterogeneous, although a plurality of firms expects
a decrease in sales and an increase in prices (32.7%)
• The rest of firms that expect a sales decrease expect no change in prices
(33.9%) or a decrease in prices (21.1%)
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Long-run versus short-run expectations
Figure: Post expected sales at the and 12 months2
2Unweighted mean is -23.9% and -19.3% and sales weighted mean is -15.5% and -10.2% for
the three- and 12-month horizon, respectively.
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A first look at sources of heterogeneity
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Role of financial frictions
0.2
.4.6
Frac
tion
<-15% -15%/-5% -5%/+5% +5%/+15% >15%Post COVID-19 expected sales growth (12 months)
Credit constrained Not credit constrained
0.2
.4.6
Frac
tion
-40 -20 0 20 40Post COVID-19 expected price growth (12 months)
Credit constrained Not credit constrained
Figure: Post expected sales and planned prices across credit constraints3
3Average increase for expected prices for financially constrained firms is 8.2% while it is
6.8% for financially unconstrained firms.
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Heterogeneous geographical and sectoral effects
• Firms are more pessimistic about sales in provinces with high mortality
• Prices are expected to increase more in high exposure areas relative to low
exposure area
• Non-essential firms are more pessimistic than essential firms
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Firms’ actual responses
0 .1 .2 .3 .4 .5
Wage guarantee funds
Partial shutdown
Total shutdown
Reduction hours worked
Employment reduction
Smart working
No action
Figure: Measures adopted in response to COVID-19 outbreak
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Econometric strategy
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Econometric strategy and estimating equation
• Availability of surveys just before and just after COVID-19 outbreak allows us
to model the revision in expectations
- exactly the same questions for expected sales (categorical) and planned prices
(continuous)
- for other continuous variables (expected sales, orders, investment, employment),
we use past expectations of sales to control for pre COVID-19 expectations
⇒ It is reasonable to assume that the revision (over this short window) is due to
the shocks associated with the COVID-19 outbreak
• General model
Ei(yi,t+1|post COVID-19)− Ei(yi,t+1|pre COVID-19) = α(CCi,t−1)ηt
+ β1(CCi,t−1)Deathsi,t + β2(CCi,t−1)Essentiali,t + γ′xi,t−1 + λs + λr + εi,t
- Ei(yi,t+1|I) captures the expectation (or plan) at time t of firm i on variable
yi,t+1 using information set I- xi,t−1 is a broad set of pre-COVID firms’ characteristics (size, age, . . . )
- λr and λs represent region and 2-digit industry fixed effects
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Baseline model
Ei(yi,t+1|post COVID-19) = δ Ei(yi,t+1|pre COVID-19) + α0 + α1CCi,t−1
+ β1Deathsi,t + β2Essentiali,t + γ̃′x̃i,t−1 + λs + λr + εi,t
• We present three set of results
i. Expected sales ⇒ OLS and ordered logit model
ii. Price plans ⇒ OLS model
iii. Other continuous variables ⇒ OLS model
(short- & long-term sales, orders, employment, tangible and intangible investment)
• We obtain analogous estimates both with and without ex post sample weights
• Results also robust to
i. using wide or narrow set of controls
ii. using common information set for deaths for all firms
iii. controlling for provincial measures of social capital
iv. clustering at the industry level as opposed to the provincial level
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Main results on sales over the next 12 months
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Main results on sales over the next 12 months
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Main results on sales over the next 12 months
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Main results on sales over the next 12 months
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Main results on sales over the next 12 months
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Main results on price plans over the next 12 months
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Main results on price plans over the next 12 months
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Main results on price plans over the next 12 months
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Main results on price plans over the next 12 months
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Main results on other variables
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Main results on other variables
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Main results on other variables
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Main results on other variables
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Summary of the results
1. Expected sales
- more pessimistic in areas more severely affected by the crisis
- negative effected significantly attenuated if the firm is classified as essential
- financially constrained firms are more pessimistic ⇒ amplification effect
2. Price plans
- credit constrained firms plan to increase prices by approximately 4-6
additional percentage points
- a standard deviation increase in the log of deaths (approximately five
deaths) raises prices by approximately 2.5 percentage points
3. Other continuous variables
- deaths have negative and significant effect on short- and long-term
expectations (larger for short-term), orders, and employment
- less negative expected outcomes for essential firms
- being credit constrained affects negatively and significantly all the variables
⇒ amplification effect
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More on financing constraints and liquidity
• Replace credit constraints with past (2018) liquidity, cash flow, tangibility,
leverage, and bank relationship variables Table
- stronger association is with the initial stock of liquid assets
- coefficient is larger for expected sales at three-month horizon
- liquidity is less significant for investment
- coefficient on leverage mostly non-significant
• If we include financial and relationship variables together with our proxy
for credit constraints, the latter dominates
⇒ our proxy contains information that goes beyond firm’s riskiness and other
measures of credit worthiness
• Probability of being credit constrained after the pandemic related to
- lagged measures of credit constraints Table
- past cash flows, liquidity, and leverage
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Models with richer interactions
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Estimating equation and results
Ei(yi,t+1|post COVID-19) = δ Ei(yi,t+1|pre COVID-19) + α0 + α1CCi,t−1
+ β1,0Deathsi,t + β1,1CCi,t−1 ×Deathsi,t
+ β2,0Essentiali,t + β2,1CCi,t−1 × Essentiali,t + γ̃′x̃i,t−1 + λr + λs + εi,t
• Fundamental conclusions are largely confirmed Tables
• There is evidence that financial frictions amplify also geographical and sectoral
components of the shocks
- interaction credit constraints and essential is now significant for sales
and investment
- interaction credit constraints and deaths is significant for sales over
the next three months
• Geographic dimension not important in determining the effect of credit
constraints on price expectations
• Being essential reduces the effects of credit constraints on prices
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More on markup and the relative
importance of supply and demand shocks
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Supply versus demand
• Credit constraints is only one reason why markup is counter-cyclical
• Other reasons for counter-cyclicality
i. in an oligopoly it is more difficult to collude during booms
ii. changes in the number of firms over the cycle affect competitiveness
• Sector dummies not significantly related to HHI or to measures of firms’
dynamics (entry+exit or exit rates)
⇒ As in the aggregate we find a mild increase in inflation,
⇒ the increase in prices we observe suggests that supply shocks are somewhat
more important than demand shocks
(at least for the non-credit constrained firms, that are the majority)
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Conclusions
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Conclusions
• Negative effect of the pandemic amply confirmed
- decrease in expected sales, order, employment, and investment
- firms planning to charge higher prices
- negative impact more pronounced in areas more affected by the pandemic
- negative effect more pronounced for non-essential firms
• Strong evidence that financial frictions amplify the effect of the shocks
- credit constrained firms have more pessimistic expectations about future
sales, orders, and plan to reduce employment and investment more
• Constrained firms expect to increase prices more than unconstrained firms
- search for and availability of liquidity key determinant of pricing plans
• The expected increase in markup for non-credit constrained firms is not
the reason why we observe an increase in prices
- large fall in quantities together with the moderate increase in prices imply
that supply shocks are somewhat more important than demand shocks
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Descriptive statisticsVariable Type Mean Q1 Q2 Q3 Stdev
Ei,t(Sales1Y): Very Negative Categorical 0.489 – – – –
Ei,t(Sales1Y): Negative Categorical 0.309 – – – –
Ei,t(Sales1Y): Constant Categorical 0.178 – – – –
Ei,t(Sales1Y): Positive Categorical 0.016 – – – –
Ei,t(Sales1Y): Very Positive Categorical 0.006 – – – –
Ei,t−1(Sales1Y): Very Negative Categorical 0.059 – – – –
Ei,t−1(Sales1Y): Negative Categorical 0.143 – – – –
Ei,t−1(Sales1Y): Constant Categorical 0.625 – – – –
Ei,t−1(Sales1Y): Positive Categorical 0.151 – – – –
Ei,t−1(Sales1Y): Very Positive Categorical 0.021 – – – –
Ei,t(Price 1Y) Continuous 0.071 0.000 0.000 0.010 0.183
Ei,t(Price (expo) 1Y) Continuous 0.022 0.000 0.000 0.000 0.115
Ei,t−1(Price 1Y) Continuous 0.011 0.000 0.000 0.010 0.061
Ei,t−1(Price (expo) 1Y) Continuous 0.016 0.000 0.000 0.030 0.045
∆ERi,t(Sal3M) Continuous -0.239 -0.400 -0.150 0.000 0.294
∆ERi,t(Sal1Y) Continuous -0.193 -0.300 -0.100 0.000 0.234
∆ERi,tOrd1Y Continuous -0.174 -0.300 -0.100 0.000 0.244
∆ERi,t(Emp1Y) Continuous -0.088 0.000 0.000 0.000 0.236
∆ERi,t(Tan1Y) Continuous -0.146 -0.100 0.000 0.000 0.322
∆ERi,t(Int1Y) Continuous -0.131 -0.060 0.000 0.000 0.312
Post-COVID Rationing Categorical 0.372 – – – –
Credit Rationing Categorical 0.178 – – – –
COVID Deaths Continuous 0.251 0.021 0.063 0.154 0.476
COVID Infections Continuous 1.951 0.337 0.843 1.853 2.774
Population Continuous 13.62 12.94 13.69 14.63 1.232
Essential Categorical 0.271 – – – –
Size Continuous 14.73 13.54 14.61 15.77 1.745
Age Continuous 3.011 2.639 3.178 3.555 0.823
Export Categorical 0.299 – – – –
Import Categorical 0.246 – – – –
R&D Categorical 0.241 – – – –
Group Categorical 0.124 – – – –
% graduated empl. Continuous 0.112 0.000 0.000 0.112 0.220
Family firm Categorical 0.707 – – – –
Leverage Continuous 0.678 0.518 0.722 0.867 0.234
Liquidity Continuous 0.128 0.015 0.066 0.183 0.127
Tangible ass. Continuous 0.211 0.038 0.143 0.329 0.207
Trade credit Continuous -0.111 -0.222 -0.048 0.000 0.147
N banks Continuous 1.008 0.693 1.098 1.386 0.468
Length bank rel. Continuous 0.597 0.251 0.470 0.775 0.534
Distance bank Continuous 5.424 5.023 5.669 6.236 1.218
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Role of liquidity (I)
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Role of liquidity (I)
Return
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Role of liquidity (I)
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Role of liquidity (II)
Return
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Role of liquidity (II)
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Role of liquidity (II)
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Interacted model on sales
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Interacted model on prices
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Interacted model on other continuous variables
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