Corporate Insolvencies in Times of COVID-19

Economic consequences of the COVID-19 pandemic have been an important issue in the public debate. In almost every country, stores and plants were closed and mobility severely restricted in order to contain the spread of the virus. Given this forced halt of many economic activities, governments have initiated quite a variety of instruments to fight against the pandemic’s negative economic impacts. In Germany, for instance, the Federal Government has granted unprecedented aid measures to companies in response to the economic crisis and the shutdown measures. These measures are described as the “largest assistance package in the history of the Federal Republic of Germany” by the Federal Ministry of Finance. Besides various instruments of liquidity provision, the government also passed a temporary amendment to the German Insolvency Law by the Federal Ministry of Justice and Consumer Protection in 2020. This amendment comprises a temporary suspension of the legal obligation to declare insolvency and has been implemented to avoid that businesses are driven out of the market by the standard insolvency rules. In fact, these rules could have prevented companies from taking out additional government-backed loans and/or would have made state banks responsible for supporting insolvent companies. More and more voices are now being raised questioning whether the temporary changes in the insolvency law are still appropriate. Critics point to the danger of the emergence of zombie companies, which in essence are not viable in the long term because their business model, for example, did not work properly even before the crisis or which, as a result of the changes brought about by the crisis, will foreseeably not prove sustainable after the crisis. Others argue that it is still too early to conclude that many businesses will revive after the lockdown and hence the exemptions from the insolvency law should be prolonged. Currently, it is barely possible to demonstrate empirically which of these two views is right or wrong as the crisis is still ongoing. This ZEW expert brief aims to provide facts on firms and entrepreneurs which despite the suspension of the filing obligation have still declared insolvency during pandemic. In this respect, our analyses provide a reference scenario for the wave of insolvency filings expected by many experts and politicians. Recent statistics show that during the first year of the pandemic the numbers of insolvency filings have decreased significantly – just the opposite what is usually observed during economic crises. In a recent paper, we show that it was precisely companies with poor credit ratings, whose rating deteriorated even further during the crisis months, which were able to avoid insolvency proceedings. Given the cessation of the insolvency law amendment, this report aims at tracking the insolvency evolution of German corporations by continuously updating the below analyses. More importantly, however, the report sheds further light on how patterns in firm and ownership characteristics of insolvent firms have changed since COVID-19 has hit the German economy. Specifically, the expert brief focuses on both firm characteristics and entrepreneur characteristics of firms that have filed for insolvency before and after the COVID-19 outbreak in Germany.

Dörr, Julian Oliver, Georg Licht and Simona Christine Murmann (2021), Corporate Insolvencies in Times of COVID-19, ZEW expert brief No. 21-04, Mannheim