Discussion of "The Asymmetric Impact of COVID-19: A Novel Approach to Quantifying Financial Distress across Industries".

ABSTRACT

The COVID-19 pandemic crisis and the associated lockdown measures have exerted significantly adverse effects on corporate sectors globally. Archanskaia et al. (2023) provide a novel empirical strategy to timely assess corporate financial distress in the EU. The contribution is two-fold. First, this paper's notion of financial distress considers both the equity position and corporate indebtedness. Second, the methodology proposed in this paper allows the authors to estimate corporate financial distress in the EU at a highly granular level and link micro-level simulations to sectoral macroeconomic outcomes. The methodology employed by Archanskaia et al. (2023) consists of three steps. First, the authors apply a nowcasting model to acquire monthly industrial turnover data. Second, they feed the obtained monthly industrial turnover into a profit-generating process via an accounting identity to estimate monthly firm profits at the firm level. Third, the authors use the estimated firm profits with a snapshot of information on pre-existing liquid assets to deduce the firm-level liquidity needs and the depletion of equity through the focus period during COVID-19. These estimated results on firm equity position and indebtedness enable the authors to quantity corporate financial distress in the EU via various angles (e.g., country-level heterogeneity, industry heterogeneity, and the targeting of COVID support policies). The primary advantage of this approach is that it deals with large datasets at the granular level and produces firm-level results almost in real-time. Therefore, it can help policymaking track the effects of crises over time. However, one can quickly critique this three-step approach for its susceptibility to the usual Lucas critique. That said, since the objective here is to estimate firm-level financial distress, a large structural model being more or less aggregate in nature, though able to mitigate the Lucas critique concern, will encounter significant challenges in estimating firm-level results with the requisite level of granularity offered by the available data. Therefore, I broadly concur with the authors' position that 'the specific contribution of this paper consists in striking a better balance between the need to carry out a multi-country evaluation of the pandemic's effects on industrial activity in a strongly integrated region like the EU and the difficulty of capturing time, industry, and country variation in turnover with sufficient granularity.'