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Financial Positions of U.S. Public Corporations: Part 3, Projecting Liquidity and Solvency Risks


Abstract: This blog post is the third in a series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response. In this post, we attempt to quantify the risk to the solvency and to the liquidity of U.S. public corporations, and how this risk can be reduced or eliminated by firms’ decisions. These calculations should be taken as illustrative only, given the high uncertainty about the evolution of the economy; they do not constitute a forecast, and reflect only the views of the authors and not of the Federal Reserve Bank of Chicago or the Federal Reserve System. First, our calculations suggest that, if firms were to keep dividend payouts, borrowing, and investment at their pre-pandemic levels, our estimate of the shock to earnings caused by the pandemic is large enough that one-fourth of public firms would run out of cash by the third quarter of 2020. Second, if firms solely increase borrowing in response to this liquidity shortage, the additional debt needed to offset the decline in earnings could lead to a doubling of the share of highly levered firms by the middle of 2021 (i.e., firms with a net book leverage above 60%). Third, reducing investment (capital expenditures) and payouts are powerful tools to avoid over-indebtedness. For instance, entirely eliminating investment in 2020 and 2021 would be roughly sufficient to keep the fraction of highly levered firms at the pre-pandemic level.

Keywords: payouts; Covid-19; Financial positions; liquidity; solvency;

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Provider: Federal Reserve Bank of Chicago

Source: Federal Reserve Bank of Chicago

Publication Date: 2020-05-14