Supporting Smes During Covid-19: The Case for Targeted Equity Injections

Abstract

We analyze the potential role of equity injections in addressing insolvency risks among small and medium-sized enterprises (SMEs) after the COVID-19 crisis. Building on firm-level balance sheet projections for a sample of European economies, we simulate selected policy interventions and assess the effectiveness and efficiency of their impact on insolvencies. We find that equity injections are quite effective at dampening the rise in insolvencies. Efficiency requires careful targeting, however; under one illustrative scenario, the cost of a program targeting only those SMEs worth saving is just a tenth of the cost of an untargeted approach directed to all insolvent firms. Overall, our paper provides a case for governments to rely more on targeted equity injections in responding to shocks that trigger mass solvency risks.

Keywords: Insolvency, Bankruptcy, small and medium-sized enterprises, SMEs, equity injections, COVID-19