Effects of financial restrictions on firms' financial resilience against the COVID-19 pandemic: evidence from the European hospitality industry

The COVID-19 pandemic has severely affected the tourism sector and the survival of hospitality firms. This study examines how hospitality firms' financial characteristics prior to the outbreak of the pandemic determined their financial resilience. We analysed a sample of large European firms operating in the hospitality industry from 2016 to 2020. Using ordinary least squares, we find significant impacts of both COVID-19 incidence (negative) and the strength of the health system (positive) on firms' financial health. Our results show that firms' recent pre-COVID-19 profitability, leverage, tangibility, and liquidity histories are key drivers of their financial health in the presence of this exogenous and extremely negative shock. Furthermore, a contextual macroeconomic factor, the interest rate, introduced as a proxy for external financial restrictions, plays a key role in the effects of liquidity and debt on firms' financial health. With higher interest rates, firms accumulated liquidity during the years prior to the pandemic, making them more resilient to the shock; in contrast, with lower interest rates, a history of limited leverage and tangibility contributed to making hospitality firms more resilient in 2020.