Department of Economics

Financial Accelerator and Firm Performance During the Covid-19 Crisis: Small vs. Large Firms

Research by Ryan Cliff

Previous studies suggest that economic shocks can propagate and be amplified through credit constraints via the credit channel. The Financial Accelerator theory outlined by Bernanke et al. (1996) explains how changes in financial fundamentals and risk perceptions in credit-markets are the cause of this shock amplification. Gertler and Gilchrist (1994) found that small firms contribute more to this propagation than large firms. However, Kudlyak and Sánchez (2017) showed a reversed relationship between firm size and economic downturn during the 2008 Financial Crisis. This paper will investigate the shock propagation of the Covid-19 pandemic using the same methods as Gertler and Gilchrist and Kudlyak and Sánchez. I use Quarterly Financial Report data on manufacturing firms to analyze firm performance and observe the behavior of small and large firms during periods of credit disruptions. I find that the findings from Gertler and Gilchrist (1994) are most similar to mine in that small firms account for a larger proportion of the economic downturn during the Covid-19 period. These results align with the initial theory of the Financial Accelerator which claims that small firms suffer more during credit disruptions due to a reallocation of credit to larger safer firms after the balance sheets of those borrowers decline. These results are also to be expected given the nature of the Covid-19 Crisis and the sectors it affected most.