The study of 655 companies across 27 countries found higher rates of COVID-19 were linked to increasing financial risk for companies in that country.
The research, published in the Journal of Banking & Finance, encompassed a broad spread of emerging and developed economies, which all followed the observed trend without noticeable outliers.
The study also found health measures had a greater long-term impact than COVID-19 support payments, according to study authors Associate Professor Eliza Wu and Dr Thomas To from the University of Sydney Business School.
The pair used credit default swaps (CDS) as a universal measure of financial risk, tracking the change in corporate CDS spreads against the weekly change in COVID-19 infection rates during 2020.
“It’s no surprise that the widespread disruption caused by the initial spread of COVID-19 triggered firms’ financial risk to increase, particularly for higher-leveraged firms, those closer to the default threshold, and those operating in industries more affected by social-distancing constraints,” Associate Professor Wu said.
“What may be surprising is that there was less increase in risk among firms that engaged in more corporate social responsibility – perhaps suggesting this helped to build trust between the company and its stakeholders, which pays off for companies during difficult times.
“Firms with stronger corporate governance and less entrenched executives also performed better during the pandemic, suggesting that managerial entrenchment impedes firms’ capacity to take effective action and reduces their resilience.”
The research found country-level factors also contributed positively to corporate resilience, including national GDP growth, better fiscal capacity, higher political stability and lower foreign direct investment.
Therefore, economic support for businesses – which has a short-term benefit in mitigating credit risk – needs to be balanced against creating excessive government debt, Dr To argues.
“Widespread access to vaccination and improved treatments has also placed developed nations such as Australia in a different position in 2022, but the current high rate of cases and deaths shows there is still much to be learned.
Too often the debate pits health against the economy, where this research again shows the two are inextricably linked.
“Companies were better off in countries that managed to keep COVID-19 cases lower, and even better off when they themselves were invested in the health and well-being of their workforce.
“It makes good economic sense to listen to the public health experts and implement measures that will help keep cases lower.”