COVID-19 and Firm Debt Financing: Evidence from China

This paper explores the effects of the coronavirus disease (COVID-19) pandemic on firm debt financing. Using a novel COVID-19 sentiment index, our estimation shows that the pandemic led to an increase in loans and a drop in debt financing cost and trade credit. We contend that the government support, which provided more financing channels, and increased default risks, which placed barriers on trade credit, are the plausible mechanisms through which the COVID-19 pandemic affects firm debt financing capacity. Heterogeneity analyses show that external financing was easier for firms subject to stringent financial constraints and intense market competition despite their lowered trade credit.